PRIME Minister Shahid Khaqan Abbasi expects the country to achieve six per cent growth in 2018 and to set the stage for an even higher trajectory with an all encompassing sectoral expansion after successful elimination of key barriers — energy and infrastructure — through concentrated efforts over the past four years.
In an interview with Dawn, the prime minister identified the external account and security situation as manageable risks but noted that economic fundamentals were strong enough to sail through challenges.
The following are the details:
Q. How do you expect the economy to perform in 2018 in terms of growth, job creation, inflation and trade?
A. Pakistan has seen a visible economic turnaround over the last four years due to the successful implementation of a comprehensive programme of economic revival aimed at higher economic growth and macro-economic stability.
The growth momentum remained above four per cent for the last three years and reached a decade high of 5.3pc in FY2017. Due to the expansion in real economic activity, economic growth in FY2017 was not only the highest in a decade, but was also broad based.
Growth in FY2018: The government is confident that economic growth will continue its upward acceleration in 2018 and beyond. For FY2018, the GDP growth target has been set at 6.0pc. Our estimates are that Agriculture will grow by 3.5pc, Industry 7.3pc and Services 6.4pc.
The production estimates of major crops such as cotton, sugarcane and rice are very encouraging. Also, disbursement of agriculture credit during July- October FY2018 has shown over 50pc increase compared to last year.
As for the industrial sector, the momentum of robust growth built during the three years is likely to further increase in FY2018. Large-Scale Manufacturing (LSM) growth performance of 9.64pc during July-October FY2018 clearly points in that direction.
It is also encouraging that this higher growth is derived from across all the industrial groups such as; automobiles (28.48pc), iron and steel (44.39pc), electronics (65.03pc), engineering products (15.29pc), coke and petroleum (15.67pc), food, beverages, tobacco (14.24pc).
In the services sector, wholesale and retail trade and transport and communication are growing in line with the improved performance of agriculture and industrial sectors. We are confident that our efforts aimed at improving ease of doing business will further augment the performance of this sector and it will continue to show healthy growth.
Job creation: As a result of various projects and programmes, aimed at improving employment levels, the unemployment rate has decreased from 6.2pc in 2012-13 to 5.9pc in 2014-15. We expect that the initiatives including CPEC will create millions of new jobs in the country in all sector of the economy in the coming years. Going forward, the government has targeted 7.0pc GDP growth in the medium-term to absorb the growing labour force.
Inflation: Although there is an increase in aggregate demand owing to the increase in economic activity along with the increase in global prices, the effective monetary and prudent fiscal policies have anchored inflation and we expect that it will remain within the target of 6pc during the current fiscal year.
Trade: The trade deficit during FY2017 increased by 37.8pc to $26.6bn. Imports were higher by 17.6pc to $48.5bn while exports were down by 0.15pc to $21.9bn. The widening of trade deficit was accompanied with a decade high level of real GDP growth.
Consequently, the pickup in economic activity, along with investments in CPEC projects, has created demand for machinery, petroleum products and other productive imports. At the same time exports declined due to the subdued global demand and depressed commodity prices.
However, exports have started recovering since the third quarter of FY 2017, partially offsetting the decline.
The exports-related incentives such as reduction in rates of export re-finance facility, the long-term finance facility, the prime minister’s export package (Rs180bn), incentives provided to textile, leather, sports goods, surgical goods and carpets as part of a zero-rated sales tax regime, drawback of local taxes and levies as well as improved global outlook have started to produce results: exports during July-November 2017-18 increased 12pc over the same period of last year.
On the import side the government has taken measures for the rationalisation of imports such as 100pc cash margins on LCs, discouraging non-essential imports through non-tariff adjustments, and an increase in regulatory duties on existing and new tariff lines.
All these endeavours are geared towards bridging the trade deficit.
Q. In an election year what will be the key drivers of growth in Pakistan where the private sector is reputed to be risk averse?
A. The key drivers of growth in Pakistan will be production (real sector — industry, agriculture, services) as well as investments.
In terms of investments, the federal Public Sector Development Programme increased from Rs348bn in 2012-13 to Rs733bn in 2016-17, while the credit to private sector (flows) has also seen a remarkable increase from negative Rs7.6bn in 2012-13 to Rs748bn in 2016-17.
The number of companies incorporated has increased significantly from 3,960 in 2012-13 to 8,286 in 2016-17.
Credit to private sector has also increased to Rs105bn during July-November 2017-18 compared to Rs60bn during the corresponding period last year.
Agriculture credit disbursement also improved by 43pc in July-November (Rs294bn compared to Rs206bn last year). FDI increased by 57pc ($1,146m in July-November 2018 compared to $729m a year ago).
The provision of a better regulatory framework through the promulgation of the new Companies Act 2017, Benami Transactions Prohibition Act, Securities Act 2015, Futures Market Act 2015, Corporate Restructuring Companies Act and several other legislations are some of the structural improvements which are helping to improve the corporate landscape.
Q. What are downside risks that could derail the economy?
A. The government recognises that external factors, e.g. lower exports, tighter international financial conditions and a faster rise in global oil prices, could pose risks to Pakistan’s economic outlook. The government is cognizant of these potential challenges and is taking measures to address them.
Various measures are taken to increase exports, increase remittances and reduce non-essential imports. A minimum of 10 pc increase in exports is being targeted which is likely to generate additional $2bn export proceeds (the increase so far is 12pc over the last year).
The Strategic Trade Policy Framework is being implemented, with focus on product and market diversification, institutional development and trade facilitation. The PM’s Export Package of Rs180bn is under implementation and an uninterrupted supply of gas and electricity to the industry is being ensured.
The agriculture support package announced in 2016-17 to boost agricultural production is also contributing. And to reduce non-essential Imports 100pc cash margin on LCs, non-tariff measures and regulatory duties on non-essential imports have been imposed.
Q. Is there a plan in place to avert an external front crisis if foreign exchange position falls to unsustainable risking default?
A. The external sector poses a challenge which is being tackled through various measures. The challenge, however, is not of a magnitude that it could lead to a crisis.
The State Bank of Pakistan’s foreign exchange reserves which were at the lowest level of $2.829bn in February, 2014 increased to $14.05bn as on 21st December, 2017.
The issuance of Eurobonds and sukuk worth $2.5bn and the policy of exchange rate flexibility being pursued by the State Bank has also helped in reducing external imbalances.
The government is actively working on other options and several proposals are under consideration, should a need arise.
Q. What are the weaknesses of the economic fundamentals and what are key fundamental strengths?
A. For many years the large energy deficit, as well as the adverse security situation, was the most telling weaknesses for the economy. Other challenges included low tax-to-GDP ratio as well as low savings- and investment-to-GDP ratios. Non-diversified exports in terms of markets and products have remained another challenge.
The present government has taken a number of measures to address these weaknesses. The security situation in the country as well as energy supplies has considerably improved. Efforts are underway to broaden the tax base. The investment-to-GDP ratio is persistently improving. The Strategic Trade Policy Framework is focusing on export diversification and value addition.
In terms of fundamental strengths, Pakistan has a vibrant economy with strong contributions from industry, agriculture and services sectors.
Pakistan is also endowed with large deposits of natural gas as well as minerals.
Pakistan also has the demographic advantage of a young population which allows us to have a large domestic workforce of both skilled and unskilled labour, as well as exportable manpower which continues to be a strong source of foreign remittances.
Our country’s location as an economic corridor between Central, South and West Asia as well as access to the Arabian Sea is also a fundamental strength. — KK
Published in Dawn, The Business and Finance Weekly, January 1st, 2018