The Asian Development Outlook by the Asian Development Bank (ADB) has projected a 4.2% economic growth for the current financial year 2014-15 against the target of 5.1%. This will be the second year in a row when the PML-N government will miss the key goal. The need of the hour is to introduce reforms in the areas of energy, taxation and public sector enterprise according to the ADB. Though, they have admitted that the economy is stable.
The advice being given to the government is to ride on the drop in oil prices and increase reforms. However, the recent shortage of petrol in Punjab and Sindh has meant that economic management in the country is distracted and missed important market signals. The global oil drop has not been taken advantage of, and corruption and hoarding of oil to drive prices up are also part of the problem.
About 4.1 per cent of our GDP growth rate is a direct result of a 5.2 per cent provisional growth rate in the Large Scale Manufacturing sector last year. This sector is not performing well this year due to energy shortages, low and declining investment in the sector and weak external demand for Pakistan’s exports. Foreign direct investment into Pakistan is stagnant while portfolio investment was picking up. This means more volatility in the market that will impact the value of the rupee. If energy sector reform is not addressed, we will lose more ground and more foreign reserves. Already our foreign exchange reserves are not sufficient to absorb any external shock.
The ADB has advised reforms of PSEs through restructuring and privatisation to make the power sector financially viable. The Finance Minister Ishaq Dar convened two meetings on Tuesday to review progress on the privatisation plan and reform of public sector enterprises (PSE) and that another meeting would happen for “further deliberations”. More details of any progress are not available, and for many, these meetings amount to nothing. We have a long history of holding on to lossmaking enterprises, including Steel Mills and PIA. We also have a long history of managerial negligence and myopic policy.
The government remains the single largest borrower in the market. Government borrowing from commercial banks crowds out the private sector and makes the balance sheets of commercial banks highly vulnerable due to concentration of government paper in its asset portfolio. Political leadership borrows, rather than broadening the tax base, flying by the seat of their pants. Planned mega infrastructure projects like motorways will increase government borrowing. Privatisation proceeds from strategic transactions like PIA will make a difference, but until tax revenue is mobilised from non-paying sectors the government will continue to borrow. The government has formulated a plan to privatise PIA and Pakistan Steel Mills and started selling its stakes in Habib Bank Limited. These divestures will provide budgetary financing, but our GDP growth is slow. It will be a slow climb, if there is one.