2017 in review: Dirty politics trumped development economics this year

2017 started off looking bright, but then turned into a dark year for Pakistan’s economy.
Published December 29, 2017

The year 2017 started on a positive note. Economy was growing, inflation was low, the rupee was stable, CPEC was progressing, Pakistan’s credit rating had improved, and the stock market was racing. There was hope for better times.

But then, things took a turn.

Political chaos hit the economy, and hit it hard. The chaos gained momentum with the formation of the Panama case JIT in April and then culminated with the Islamabad sit-in by a faction of the religious right in November.

The prolonged chaos changed the once hopeful sentiment. The economic narrative shifted to fiscal deficit, trade deficit, rising debt, setbacks for CPEC, an overvalued rupee, and a sliding stock market. Pessimism sidelined hope.

Let’s look back at the highlights of 2017.

Regaining economic growth momentum

The Economic Survey put the GDP growth for 2016-17 at 5.3pc, noting that it is the “highest growth rate recorded in a decade.” The World Bank in its Pakistan Development Update said: “Pakistan's economic performance remained robust during the fiscal year 2017 (FY17) as growth continued to accelerate.”

IMF’s Article IV Consultation had a similar view: “Pakistan’s outlook for economic growth is favourable, with real GDP estimated at 5.3pc in FY 2016/17 and strengthening to 6pc.”

The State Bank of Pakistan’s (SBP) State of the Economy also agreed: “The real GDP growth in FY17 was the highest during the last ten years. It was led by a rebound in agriculture and a broad-based increase in value addition by services sector.”

Inflation in low single digit

Inflation, a tax we all pay, is perhaps the most significant economic statistic for ordinary Pakistanis. It remained at around 4pc. This is according to the Consumer Price Index by Pakistan Bureau of Statistics (PBS), if you are willing to believe the Bureau.

That surely does not mean that the price level of essential goods is within the reach of common Pakistanis. What it means is that these essentials did not move much further out of their reach.

Inflation was contained thanks to factors like lower international petroleum prices, which have begun to rise, and a stable Pakistani rupee, which has started to weaken. However, according SBP, in 2017-18, “overall inflation is expected to remain well below the target of 6pc.”

Population hits 207.77 million

Pakistan's population has officially hit 207.77 million. This is the provisional result of the 2017 census data by the PBS. The data has been collected after nearly two decades and it has not been without controversy.

The compound annual growth rate for the population since 1998 turns out to be 2.4pc, well above the global average. Female population is 101.3 million or 48.76pc.

The share of population of Punjab and Sindh decreased while that of Khyber Pakhtunkhwa and Balochistan has increased.

According to the Word Bank, Pakistan is the sixth most populous country following China, India, USA, Indonesia and Brazil.

Policy rate maintained at 5.75pc

SBP kept the policy interest rate at 5.75pc, where it has been since May 2016. Credit to the private sector grew on a year-over-year basis in 2017-18 by 18.5pc.

According to the monetary policy statement issued in November, “The already buoyant growth in fixed investment gained further traction at a slightly higher level relative to FY17, while both working capital loans and consumer financing showed encouraging trends.”

SBP says that the prospects of achieving the 6pc target of real GDP growth continue to be strong due to the availability of cheaper money and higher credit off-take by the private sector. Critics are bound to be divided on whether this is feigned optimism by SBP or an objective analysis.

Official unemployment at 6pc

Another statistic that is close to the hearts and minds of Pakistanis is the unemployment rate. Officially, it is around 6pc but not everyone is willing to believe it.

The credibility of economic data in Pakistan in general has long been subject to debate. But the unemployment number stands out because of the incredulity surrounding it.

The army of applicants applying for every advertised job in 2017 surely does not suggest unemployment is low. In one of its report, marketing research firm Nielsen puts the employment rate at 51pc, leaving the unemployment rate much higher.

There will inevitably be issues regarding definition and measurement techniques, but the wide gap between the public and private sector estimates leaves one scratching one’s head as to what the unemployment rate really is.

Government weakens, key offices change hands

Economic issues took a back seat for most of the year as the leadership got occupied with the ongoing political turmoil. The government was greatly weakened and its fragile writ was fully exposed in the Islamabad sit-in.

Following the disqualification and resignation of prime minister Nawaz Sharif, the embattled finance minister Ishaq Dar has taken leave of absence.

The office of secretary finance and chairman of FBR changed incumbents. A new governor assumed office at SBP, and an acting chairman was appointed at Securities and Exchange Commission Pakistan (SECP) after the former chairman was suspended in the “record tampering” case.

It has been a surreal experience watching all the key policy makers get replaced in a matter of months. The economic challenges were mounting, the economic leadership was conspicuous by its absence, and no one was counting the cost of political uncertainty.

CPEC dominates economic discourse

There are great expectations from CPEC and they keep becoming greater. The seventh round of the CPEC Joint Cooperation Council took place in Islamabad in November.

According to the official announcements regarding the long-term plan, “By 2025, the CPEC building shall be basically done, the industrial system approximately complete, major economic functions brought into play in a holistic way, the people’s livelihood along the CPEC significantly improved, regional development more balanced and all the goals of Vision 2025 achieved.”

The largest sector under CPEC is energy, where shortages have long been the bane of our economy. The government is now examining a proposal to replace the US dollar with the Chinese yuan for trade between China and Pakistan.

All, however, is not reported to be well with CPEC. There have been news items about potential setbacks with calls for greater transparency.

Remittances could be slowing down

Remittances, recorded at $19.3 billion during the last fiscal year, have long helped manage Pakistan’s trade deficit. Unsurprisingly, of the total global remittances, 80pc are received by 23 countries, led by China, India, the Philippines, Mexico and Pakistan.

The World Bank’s Migration and Development Brief says that Pakistan had witnessed 12pc growth in remittances in 2015, which moderated to about 2.8pc in 2016 and is expected to grow by a meagre 1.4pc in 2017.

SBP’s forecast for remittances for the current fiscal year is between $19 and $20 billion. The SBP in collaboration with Pakistan Remittance Initiative has introduced Asaan Remittances Account to help move traditional over-the-counter cash transactions to formal banking channel.

Remittances during July to October 2017 have reportedly grown by 2.3pc and it is an open debate if the growth has slowed down as much as anticipated.

Terror and political violence remain alive

Unlike some of the traditional economic indicators, such as inflation and unemployment, terror and political violence are not systematically measured and publicised in Pakistan. This is quite puzzling given that they have an unusually strong link to our economy.

A report published in 2017 by the US State Department says that terror in Pakistan is on the decline. A publicly available data set says that fatalities from terror incidents were 1209 in 2017, down from 1803 in 2016.

While terrorism is receding, its frequency is still disturbingly high and recurrent. The violent ending of the Islamabad sit-in by a faction of the religious right shows that political violence is very much alive and it is hurting economic activity.

Budget offers little good news for financial markets

PML-N's government unveiled its fifth bugdet of Rs4.5 trillion, allocating Rs1 trillion to development projects and Rs920 billion to defence spending. The budget offered little good news for financial markets.

The tax rate on capital gains on securities was increased to a flat 15pc for filers and 20pc for non-filers regardless of holding period.

A super tax of 4pc for banking companies and 3pc for persons other than banking companies earning more than Rs500 million was extended to 2017-18.

How the Federal Board Revenue has gone about increasing tax revenue has been criticised and the Board continues to be assailed for corruption. If critics are to be believed, the government is now set to miss all the major budget targets including the GDP growth of 6pc, containing budget deficit of 4.1pc, and increasing tax- -to-GDP ratio of 13.7pc.

Pakistan reenters MSCI (formerly Morgan Stanley Capital International) emerging market index

Pakistan’s stock market soared because large inflows by foreign funds were expected after the country regained entry into the MSCI Emerging Market Index.

Anticlimactically, however, it was found that contrary to hype. The market had experienced more outflows than inflows because the MSCI Emerging Markets Index gave Pakistan a relatively low weight.

Together with mounting political uncertainty, rising deficits, disappointing budget, and fears of depreciation of the Rupee, the MSCI surprise was a hard blow for the investors.

Later in the year, Pakistan’s weight was further reduced during review of MSCI indexes. After rising 46pc in 2016, the KSE-100 index has fallen by more than 25pc from the all-time high it hit in 2017.

The market price-to-earnings ratio has slid down to about nine times but investors seem uninterested. On the bright side, in a welcome break from the past, and despite the very large movements in the market, there have been no chain defaults.

Chinese acquire strategic stake in PSX

In a leap forward for PSX, its stock brokers sold 40pc of their shares for US $85 million to a consortium of Chinese securities exchanges, Pak-China Investment Company, and Habib Bank Limited.

The demutualisation, integration, and attraction of foreign strategic holding had been contemplated by SECP since 2002. It finally happened 15 years later in 2017.

Following the strategic investment, PSX also got listed on itself though there was limited investor interest in its shares during the book building process. Many investors in Pakistan are still trying to get their head around the fact that the exchange itself has become a listed company.

HBL’s scandal shakes the banking sector

HBL, one of the largest banks in Pakistan, was rocked by a money laundering scandal that shook the entire banking sector. The Department of Financial Services of New York State alleged that HBL had committed 53 separate violations between 2007 and 2017.

While details about the wrong doings remained sketchy, HBL agreed to pay a fine of $225 million. It is a huge amount, but still less than half the $630 million that the US authorities had reportedly assessed.

Interestingly, news that all was not well at HBL’s branch in New York had been appearing for a few years but had not gained public attention. HBL announced that its president and CEO is bowing out and so is its branch in New York.

Companies Act 2017 promulgated

The Companies Act 2017 was promulgated in May replacing the Companies Ordinance, 1984. A feather in SECP’s cap, this is the longest piece of legislation ever approved by Pakistan’s parliament.

This was a mega project many years in the making. The new act focuses on abolishing unnecessary requirements and benefitting from the use of technology. It envisages a softer regime for companies without public interest.

Among its many features are mandatory minimum quotas for women directors and persons with disabilities. This act will continue to touch each of the roughly 80,000 companies registered in Pakistan and the lives of millions of Pakistanis for many years to come.

Deficits and debt stoke fears

The fiscal and trade deficits have been mounting. As one news report in September put it, fiscal deficit hit 5.8pc of GDP reaching “Rs1.864 trillion mark in absolute terms, the highest in four years of the PML-N government as well as in the country’s 70-year history.”

IMF says Pakistan has the potential to reach a tax-to-GDP ratio of 22pc but it remains just that: unrealised potential. New records of trade deficit were being set with such frequency that it became difficult to keep up.

“Never before in the country’s history have imports been over two-and-a-half times of exports as they are now,” lamented an observer, as trade balance worsened. The ratio of gross public debt to GDP, as reported by the SBP, remained above 60pc.

There has been ongoing speculation as to whether Pakistan would return to borrowing from IMF and face the painful adjustments. The government sought to buy time by raising $1 billion through sukuk at 5.625pc and $1.5 billion via eurobond at 6.875pc.

The oversubscription and competitive yields of the issues show the creditors of Pakistan are less concerned about our economic challenges than some of the local economists.

Rupee depreciates and remains under pressure

That the rupee was overvalued was being suggested. There were a range of estimates from 20pc to 40pc. There has been a bitter debate if devaluation has even worked for Pakistan.

But early in December, “the State Bank launched what appeared to the rest of us like an ambush” and the rupee, that opened at 105.5 against the dollar, quickly hit 109.5, and has remained volatile since. Devaluation is not without consequences but it is uncertain by how much it will fuel inflation.

Water crisis bubbling under

While most of the economic focus is on our twin deficits, a major challenge that is bubbling under is water stress. There were a series of disturbing reports on the water situation in Pakistan. According to WaterAid, “Pakistan is among the world’s 36 most water-stressed countries” and “among the top 10 countries with the greatest number of people living without access to safe water.”

As per the Pakistan Council of Research in Water Resources, Pakistan may run dry by 2025 if the present conditions continue. In another report by Institute of Public Policy, there are five challenges on the supply side: water scarcity resulting from higher demand and diminishing capacity of reservoirs, excessive conveyance losses, deteriorating infrastructure, high operation costs and an excessive groundwater use.

The Supreme Court called upon the chief ministers of Sindh and Punjab expressing concern over the lack of availability of potable water.

Cyber crime makes its presence felt

ATM skimming hit the headlines towards the end of the year. HBL confirmed that Rs10.2 million had been stolen from 559 accounts. The scandal was far from huge.

We are talking about less than 1,000 people and just about Rs1 crore in the whole country. But the media outcry it generated was indeed huge.

On the bright side, the media outcry created more awareness about cyber crime than the National Response Centre for Cyber Crime under the FIA could ever expect to achieve through its awareness activities.

In sum, politics trumps economics in 2017

Looking back, 2017 started off looking bright, but then turned into a dark year for Pakistan’s economy. This unwanted twist was not caused by bad luck or a natural disaster. It was very much the making of powerful Pakistanis eager to play a game of thrones.

They put their ambition, their ego, and the glory of their institution above that of Pakistan. None of them came out a winner.

Be it any party or the parliament, the judiciary, the army, or the media, all have suffered reputational damage during 2017. But there has been one clear loser: Pakistan.

Dirty politics trumped development economics in 2017. It could have been a much better year for Pakistan’s economy, but it was not.