LAHORE - Local currency appreciation, accumulation of foreign exchange reserves, improved growth of large-scale manufacturing, expansion in private sector credit and decreasing inflation due to lowering oil prices, are some positive aspects of the Pakistan’s economy in 2014 but the energy situation is not showing any significant improvement with exports continued to be stagnant for the last many years, despite granting of Generalised System of Preferences plus status by the European Union.
Other targets that have been missed by the government included lower investment and savings rates and rising unemployment rate which has crossed 7 per cent in 2014.
The 2014 also proved to be tremendous year for Islamic banking and finance industry, as it is not only exceeded the limit of 2 trillion dollars assets but it also got access to the new markets including various new destinations of European region, Korea, Australia, Brazil, Malta, Argentine, China and many more. Zubair Mughal, Chief Executive Officer, Al Huda Centre of Islamic Banking and Economics (CIBE) said that it is probable to exceed 2.5 trillion dollars in this year. Islamic banking and finance gained the popularity in its traditional markets of e.g. Malaysia, Pakistan and Middle East as well.
He said that Islamic banking share is 86%, Sukuk 6%, Islamic fund 4%, Takaful 2%, and Islamic microfinance 1%. There are more than 1500 organizations working for Islamic banking, finance, Takaful, Sukuk, Islamic Fund, and Islamic microfinance in more than 90 countries all over the world in which Non-Muslim countries share is 40%, he added.
“The calendar year 2014 is ending with a mixed performance as on the positive side, stability has been achieved in the foreign exchange market, with a major appreciation in the value of the rupee with foreign exchange reserves have increased by over 50 percent, due to borrowed money or buoyancy in remittances but continued gas and power loadshedding are the headache of govt resulting into less exports volume and higher trade deficit, keeping the GDP ratio at lower side,” observed Dr. Salman Shah, a leading economist.
The major concern of the business and industry was power loadshedding and the government had committed to resolve this issue through reforms in energy sector which have not been initiated till the end of 2014, he added. The privatisation of DISCOs or GENCOs without any reform to worsen the energy situation in the country, he warned.
APBF founding chairman Syed Nabeel Hashmi observed that the cost of doing business has gone up by about 25 per cent in 2014 while the profits have dried up due to increasing cost. Industry is facing total loadshedding of gas and partial loadshedding of electricity. Minimum wages were increased by about 35pc. He said that electricity tariff was Rs 9.04 per industrial unit in previous regime as against Rs.18 per unit today in 2014.
Refund of Sales Tax and duty drawback is historically slow and it may pile up as a next circular debt of our economy. Government failed to maintain consistent exchange rate and this affected our export sector. Presently export sector lacks level playing field with India, Bangladesh and China, he added.
The governance suffered as almost all the regulatory institutions faced uncertainty at the top. The Securities and Exchange Commission of Pakistan was managed for almost a year by an acting chairman and the new chairman was appointed in the second week of December. The Competition Commission of Pakistan is still managed by an acting chairman. The appointments of heads of power distribution companies have been delayed. OGDC, PEMRA, National Tariff Commission and other regulatory bodies operated for a considerable period without a head.
The large scale manufacturing growth inched up by 1.95 percent during the last five months of calendar year 2014. The GDP growth during the year 2014 has averaged on 4 percent which is not enough to even sustain the current high poverty level. Pakistan according to economic experts needs to grow at above 7 percent to ensure employment to about three million new workforce that joins the labour market every year.
The exports during July-November 2013 were worth $10.35 billion that have declined by 4 percent during July-November 2014. This decline in exports is a shock for planners who were expecting Pakistan to add at least $2 billion in exports because of the GSP Plus status. The textile exports that were supposed to increase by 25 percent in 2014 inched up by only four percent in the last six months. It was not because of scarcity of orders but mainly due to closure of 70 percent of the basic textile industry capacities by 33 percent.
The non-textile exports declined even more sharply. Similarly, the imports were $20.37 billion during the same period this year against imports of $18.11 billion in the corresponding period of last year. However, the trade deficit instead of narrowing has widened during this period. The economic planners would have to revisit their import policies to curb this surge in imports. Higher imports were triggered by acute energy and power crisis in the country. The government would have to set its priorities right in supply of gas and power as is done in neighbouring India and Bangladesh. These two countries give preference to industry over even domestic sector.
Inflation from January to June 2014 averaged 8.33 percent reaching the peak of 9.2 percent in April’14. The inflation declined appreciably in the next five months to an average 6.38 percent with peak inflation of 7.9 percent in July and lowest of four percent in November 2014. The inflation was not tamed because of government efforts. The budget deficit is still very high; the tax collection is below target, power sector dues have increased. However the global decline in petroleum rates and other commodities have lowered the costs appreciably.
Tax evasion remained rampant throughout the year. The under invoicing of finished products like tyres, artificial leather, shoes, home appliances, etc continued to marginalise the domestic industry. The national saving ratio also remained dismally low during the year being in the vicinity of 12 percent against 31 percent in India and 37 percent in China.
Dr. Ashfaq Hassan Khan stated reform initiated by the government helped improve economic conditions during the year. Renewed support from development partners and a $2 billion Eurobond issue helped stabilise the currency and rebuild foreign exchange reserves from very low levels. However, huge reforms would need a long time of several years to eliminate electricity and gas shortfalls and to effect the change needed to lift structural constraints on growth.
He said that the consolidated fiscal deficit was contained at 5.5 per cent of GDP in FY2014, down from an average of 8 per cent in previous 3 years. This improvement came mainly from a large increase in non-tax revenues and a provincial cash surplus equal to 0.3 per cent of GDP. The budget for FY2015 targets further reduction in the fiscal deficit to 4.9 per cent of GDP through expenditure economies, reduced energy subsidies, and a provincial cash surplus equal to 0.9 per cent of GDP.
Dr. Hafiz Pasha said that there is controversy about the government’s claims of a Gross Domestic Products growth rate of over 4 percent in 2014.
The governments’ claim the fiscal deficit target of 5.8 percent of GDP has been met is based on substantial overstatement of the combined cash surplus of the provincial governments by almost Rs150 billion. As such, the actual fiscal deficit is closer to 6.4 percent of the GDP, he added. On the domestic front, the army is engaged in military operations (Zarb-e-Azb) and the political situation has become more tense and unpredictable.
In this environment of uncertainty, most government targets appear very ambitious for 2014-15.
FPCCI President Zakariya Usman said that recent political unrest, terrorist threats with attendant military operations in the border region with Afghanistan, sectarian violence, and urban criminal activity all remained significant risks in 2014. Recent floods presented additional downside risks to growth and fiscal performance in 2014.
He said that the country continued to face external vulnerabilities. He said that 2014 will be remembered as the year of stability for Pakistan’s economy as major positive developments were witnessed during the year. Inflation in 11M2014 remained stable at 7.5pc as compared to 7.54pc in corresponding period last year. Similarly, policy interest rate also remained stable at 10pc during 10M2014, which were later lowered in Nov 2014 as SBP slashed discount rate by 50bps to 9.5pc. Sharp influx of foreign inflows also led to a stable exchange rate as Rupee-Dollar parity averaged 101.0 as against 101.5 during 2013.