ISLAMABAD - Pakistan Institute of Development Economics (PIDE) on Wednesday noted that economic indicators of the country have started performing well.
“The panic that prevailed in the forex market and on external account for months has given way to ‘comfort’, inflation has receded, fiscal deficit is even lower than envisaged, perceived business confidence has shored up, large scale manufacturing coupled with credit to private sector has picked up too. The revenue collection is somewhat behind target and the low fiscal deficit comes at the back of re-emerging circular debt and less than budgeted public sector development expenditure”, said PIDE Economy Watch released on Wednesday.
While quoting State Bank of Pakistan’s figures, the PIDE’s Economy Watch said country’s GDP growth would be around 3.5-4.5 percent during ongoing financial year 2013-2014, which remained at 4.1 percent during six months (July-December). Similarly, inflation rate is projected at 8.5-9.5 per cent and fiscal deficit at 6-7 percent of the GDP during current fiscal year.
The Economy Watch stated that rupee depreciation against dollar registered during the initial months of the incumbent regime was fully offset by the wave of appreciation observed in March 2014. The appreciation was triggered by management of the forex market and strengthened by the receipt of $1.5 billion from Saudi Arabia. Floatation of Euro Bonds of $2 billion has curbed the fears that the appreciation is temporary. The volatility observed in the forex market speaks of the need to keep a stronger watch and devise rules for greater transparency in the forex market transaction.
Pakistan’s reserves stood at $5.36 billion by the end of March 2014 with the inflows on account of 3rd tranche from IMF, $1.5 billion from Saudi Arabia and $2 billion on account of Euro bonds. Media reports suggest that only one winner of the 4G license will pay the license fee in dollars while the rest of the winners of 3G/4G licenses will pay in rupees. Thus the boost to foreign reserves expected on account of sale of these licenses may not be much.
According to the Economy Watch, Federal Board of Revenue is struggling to achieve the revenue collection target. The revenue target of Rs.2475 billion envisaged in the budget has been revised downwards to Rs. 2345 billion. A total of Rs. 1575 billion has been collected during the 9 months (July-March) of this year. This leaves Rs. 770 billion to be collected during the last quarter of the current fiscal year to meet the revised revenue target. Even after accounting for the typically larger collection in the last quarter of the fiscal year a target of Rs.256 billion per month is ambitious given that on average Rs.170 billion have been collected during the nine months.
Inflation is down to 8.5 percent as at end of March from 9.2 percent three months earlier.
The respite in inflation is owed to factors like stable food and oil prices and improvement in the fiscal deficit. The improvement in the fiscal deficit has to be considered in the backdrop of significantly less than budgeted releases against the Public Sector Development Program (PSDP) and the rising circular debt. Out of the full year PSDP of Rs.363 billion Rs.145 billion had been released by April 18, 2014, which accounts for only 40 percent of the budgeted PSDP. Going by the procedure for release till now 70-75 percent of the funds budgeted in the PSDP should have been released.
The large-scale manufacturing grew by 5.16 percent during the 8 months of the current fiscal year as against 3.32 percent in the corresponding period of last year. At the disaggregate level exceptional increase was observed in the production of switchgears (126%), deep-freezers (107%), and air conditioners (88%).
Credit to the private sector has unambiguously picked up during July-March 2014, 131 percent increase over corresponding period of last year, though a slight decline in the extension of credit to the private has been observed in the January and February 2014. The jump in extension of credit to the private sector reflects an increase in economic activity.
The Economy Watch reveled that discount rate was kept unaltered at 9 percent in the monetary policy announced on March 15 2014. The tamed inflation suggests that it is possible to slash the discount rate and the signals emanating from SBP also suggest that the rate in fact might be slashed in the next monetary policy to be announced in mid-May.
The FDI increased by 31.9 percent over the last quarter, the increase primarily was observed in January 2014. The spike observed in January is owed to inflows in power, food, construction and financial sector. Remittances from overseas Pakistanis have registered an impressive growth of 12 percent during the nine months.
Though the stock market has performed well during the last nine months however various factors make it difficult to rely on the KSE index to predict the long term trend of the country’s economy. These factors include; under-representation of major sector, like agriculture and services in the stock market, tilt of the index towards large firms, small capitalization value and volatility of the stock market relative to other stock markets.