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Where is the private sector’s money going?

Updated August 28, 2017

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Pakistan’s economy has been on a growth trajectory since the Pakistan Muslim League-Nawaz returned to power for a third term in 2013, with GDP expanding by 5.3pc during the last financial year.

The growth attained last year was the highest in one decade in spite of a slowdown in industrial growth and lacklustre performance of large-scale manufacturing under the PML-N government.

So what has driven growth in the last four years?

Over time there has been a slowdown in industrial growth. What then has driven GDP growth in the last four years?

The primary driver of growth, the government admitted in the Economic Survey of Pakistan 2016-17, has been domestic consumption.

“The support to GDP growth mainly came from increased domestic consumption. Low inflation, higher income levels of both farmers and (urban) middleclass (have) bolstered consumption spending in the economy,” it noted.

On the other hand, investment, particularly private investment, played a mere supportive role instead of being the lead driver of growth.

For example, consumption shared 7.9 percentage points to GDP last fiscal year, up from 6.2 points a year ago. This compares with net investment contribution to growth of just 1.3 percentage points, up slightly from 1.0 point the previous year. Little wonder then that exports’ contribution to growth shrank 3.5 percentage points.

Moreover, investment during the last few years is dominated by the public sector as the government, helped by low global oil prices, has constantly increased its development expenditure — especially on large infrastructure projects related to the CPEC initiative.

Indeed, the share of public sector expenditure in gross capital formation has significantly grown since the start of work on the trade route connecting China with global markets via the deep-sea Gwadar port in Balochistan.

This brings us to the question as to where private money is going?

Analysts say private investment has actually been driving domestic consumption as the contribution of private consumption to GDP grew to 6.7pc last fiscal year from 5.3pc a year back compared with public consumption rising to 1.2pc from 0.9pc.

“Private investment is driving domestic consumption. Domestic businesses are currently investing in sectors like auto, steel, motorcycles, food and cement to meet the strong demand,” points out Ali Jumani, a research analyst at Alfalah Securities.

Interviews with businessmen show that mostly the existing players in these sectors are increasing their production capacities as they feel that demand for these products is going to grow further over the next few years thanks to increasing middle-class income. The Corridor initiative too has pushed demand for these items.

A few are also setting up greenfield projects, particularly in the automotive sector, and others are investing in real estate development as domestic consumption rises going forward.

Several textile exporters have already ventured into the domestic retail market, education and healthcare to fill in supply gaps. No one is investing in export-oriented sectors because of the rising cost of doing business and unfavourable government policies.

Ali Asghar Poonawala is of the view that private capital is shying away from export-oriented manufacturing because of higher cost of production (which has made Pakistani exports uncompetitive in the world market), geo-political tensions in the region and government policies.

Moreover, Pakistan’s export advantage lies in agro-based industries, he says. “But we are unable to use that advantage to increase our exports because of different factors. Take the example of meat exports. You need to invest very heavily in the entire supply chain to build up the capacity to export meat. You also require a comprehensive regulatory framework and policy support for quality assurance and implementation of food safety and other standards to compete with rivals in international markets,” he says.

Former finance minister Shaukat Tarin notes that growth based on domestic consumption is not sustainable for very long and would result in another severe external sector crisis.

“History shows that only countries like China, Korea, etc, which pursued export-led growth policies, have developed rapidly. Others (like Pakistan) continue to lag far behind.

“We need to form policies to encourage private investment in export-oriented manufacturing. The more you delay the closer you get to yet another (balance-of-payments) crisis,” he warns, emphasising that all the past financial crises Pakistan had to face resulted from our inability to pay our import bills.

“How long can you survive on borrowed money? The only sustainable solution to our economic problems lies in making our exports competitive in international markets by devaluing the currency to its real value, incentivising value-addition in leather, textiles and other export-oriented sectors, and promoting industries and agriculture where we have an advantage (over our rivals).

“International competition will also help manufacturing improve its efficiency, acquire new technology and ensure quality. The government must organise a dialogue with the businesspeople for formulating a comprehensive industrial policy that can help us boost our exports.”

Published in Dawn, The Business and Finance Weekly, August 28th, 2017