Economic growth & deficits

Although Pakistan achieved a decade highest economic growth of 5.3 percent in 2017 but it struggled to maintain deficits including current account and budget deficits. The growth puts the country in the league of economies that have a size of over $300 billion. Pakistan’s economic growth had attained the pace it had before the crisis hit the country in 2008. The government is now eying to take growth to 6 percent during current fiscal year.  However, unemployment rate remained high and there was no official plan to tackle it.

On the other hand, the government is struggling to manage external vulnerabilities. The country’s foreign exchange reserves are sharply eroding due to widening of current account deficit (CAD). The CAD had widened to a recorded level due to faster growth in imports as against growth in exports and foreign remittances. In last month (December) of the year, the rupee also depreciated by around 5 percent against the US dollar. Dollar value has gone beyond Rs110.5 per rupee, closer to the equilibrium.

Pakistan’s stock market tumbled after Supreme Court disqualified the former Prime Minister Nawaz Sharif in panama papers case on 28 July 2017. The KSE 100 index slipped to 38,000 points from highest ever KSE-100 was reported on May 24, 2017 at the level of 52,876.

The government did not revive the privatization of public sector entities including Pakistan International Airlines (PIA), Pakistan Steel Mills and power generation and distribution companies. Power sector bleeding could not be stopped and circular debt again piled up to Rs 800 billion, including arrears parked in a power holding company. However, the Ministry of Water and Power had slightly improved bill collection and marginally reduced line losses.

In its four and half years tenure of the PML-N, Prime Minister Shahid Khaqan Abbasi had taken the control of the economic affairs of the country for the first time after granting indefinite leave to Ishaq Dar, who is receiving medical treatment in London. The accountability court on September 27 this year indicted Dar in a corruption reference. He is accused of accumulating assets worth Rs 831.7 million, the amount is disproportionate to his known sources of income.

Meanwhile, the pace of taking foreign as well domestic loans also expedited during 2017. Besides taking more than $10 billion foreign loans during last fiscal year, the government also borrowed around $ 4 billion during five months of the ongoing financial year. Pakistan had recently successfully executed US $ 1.0 billion five years Sukuk and US$ 1.5 billion 10 years Eurobond transactions at a profit rate of 5.625 percent and 6.875 percent respectively.

The government also failed to constitute fresh revenue sharing formula, National Finance Commission (NFC) Award, between centre and the four provinces. The government had extended the 7th NFC award for consecutive two years after previous award was expired on June 2015. Meanwhile, the World Bank ranked Pakistan at 147th out of 190 countries in its ‘Doing Business 2018’ report.

Although, Pakistan had decided not to take any International Monetary Fund (IMF)’s programme before next general elections, but government would be requiring $16 billion financing gap in the current fiscal year. The current account deficit could peak to $18 billion and debt servicing requirement would be standing at $8-$8.5 billion so total financing requirement could touch to $26 billion. However, the traditional foreign inflows would be hovering around $12 billion so remaining $16 billion would remain big challenge for the country’s economy.

Pakistan’s current account and budget deficits had ballooned since completion of International Monetary Fund (IMF)’s programme.

Current Account Deficit

The current account deficit (CAD) had recorded at $12 billion during the fiscal year (FY2017). The CAD surged by 122 percent to $5.013 billion in the first four months (July-October) of the current fiscal year as compared to $2.259 billion of a year ago. The CAD is widening as higher imports growth offset the improvement in exports. The CAD is likely to touch $18 billion by the end of current fiscal year. The CAD is widening due to massive increase in trade deficit. Pakistan’s trade deficit widened by 36.32 percent to highest ever level of $32.58 billion during fiscal year (FY17) because of the record increase in imports and decline in exports. Country’s imports were recorded at historic level of $53.02 billion during the FY17 as against $20.45 billion exports during previous financial year. Same trend continued in the current fiscal year. Pakistan’s trade deficit had swelled to $15 billion with exports of $9 billion and imports of $24.1 billion during first five months of the current financial year as against $19.9 billion of the same period last year

Budget Deficit

The government had not controlled the budget deficit due to massive reduction in tax as well as non-tax collection. Deficit had gone to 5.8 percent of the GDP (Rs1.9 trillion) during financial year (FY2017) as against the target of 3.8 percent of the GDP. The government had missed the tax collection and non tax collection target during last fiscal year. Meanwhile, fiscal deficit had recorded at 1.2% of gross domestic product (Rs431 billion) during first quarter of the current fiscal year. The revised 1.2 percent deficit indicates that like the previous fiscal year the government will miss the annual 4.1 percent target by a wide margin this year too.

 Tax Collection

Federal Board of Revenue (FBR) had shown mix performance regarding tax collection during the year 2017. Tax collection remained below target during first half of the year due to the government’s policy to provide relief to different sectors. The government had missed the fiscal year’s target by Rs260 billion. The FBR collected Rs3.361 trillion against a parliament’s approved tax collection target of Rs3.621 trillion for FY2016-17. However, the FBR collection showed 20 percent during second half of the year. Provisional net revenue collection was recorded as Rs. 1302 billion for the first five months of the fiscal year with an increase of around 19.55 percent over the net revenue collected during the same period of last fiscal year. During fiscal year 2016-17, the collection for the first five months stood at 1089 billion.

Foreign Exchange Reserves

The country’s reserves had tumbled by $5 billion in one year. However, at the end of 2017, the government successfully generated $2.5 billion by issuing Euro and Sukuk bonds in international market.  Gross foreign exchange reserves held by the State Bank of Pakistan went up by to $14.67 billion, worth three months of import cover. Meanwhile, gross reserves, which included commercial banks reserves, are around $20.7 billion in December 2017 as against $23.2 billion of 2016. Reserves are gradually declining now due partly to steadily declining exports, ballooning consumer goods imports and imports of investment goods for the China Pakistan Economic Corridor (CPEC). A burgeoning debt service, which is already 29 per cent of export earnings, is adding to the burden.

Inflation

Inflation rate remained under government’s target. The government had restricted the inflation rate at 4.16 percent during fiscal year (FY2017), well below the target of 6 percent. The CPI based inflation has recorded at 3.59 percent during first five months (July-November) of the current fiscal year. Higher international oil prices along with pass-through to domestic petroleum prices and the imposition of regulatory duty on non-essential import items are expected to increase inflation in the coming months,” the State Bank of Pakistan (SBP) noted. However, while taking into account these effects, inflation is still expected to fall inside the range of 4.5-5.5 percent during ongoing financial year.

Foreign Direct Investment

Pakistan drew $2.410 billion in foreign direct investment (FDI) during last fiscal year of 2016/17, up 4.6 percent from a year earlier. FDI into Pakistan grew at faster pace in five years in FY17 as Chinese firms continued to invest in electricity generation and construction sectors largely under the $57 billion worth China-Pakistan Economic Corridor (CPEC) initiative.

Chinese investments accounted for nearly half of the total foreign direct investment received by the country in FY17.  Net FDI from China increased 11.47 percent to $1.185 billion during last year.

Meanwhile, Pakistan’s FDI stood at $939.7 million in the first four months of the current fiscal year, 74.4 percent above the inflows recorded during the same period a year ago. Chinese investment came at $631.7 million, up 224.6 percent from the same period in FY17. The Chinese firms invested a large part of their funds mostly in energy and infrastructure projects under China-Pakistan Economic Corridor (CPEC).

Loans

The incumbent government had taken around $35 billion foreign loans during last four years in order to maintain its reserves and repay previous loans. About $17 billion of the total loans taken were utilised to repay the previous debt during last more than four years. Pakistan’s external debt and liabilities have mounted to $85 billion by September-end this year, according to State Bank of Pakistan (SBP).  Out of $85 billion, public external debt including debt and liabilities of the public sector enterprises stood at $70.3 billion by September this year. The share of the public external debt was $67 billion.

CPEC

The overall size of the China-Pakistan Economic Corridor (CPEC) projects grew to $60 billion from initial $54 billion. In a major development, Pakistan is looking for the possibility of replacing dollar with Yuan in cross-border trade with China. Pakistani currency would be used within the country, but China desired that bilateral trade should take place in its currency — known as Renminbi (RMB) or yuan. Pakistan and China agreed to establish and improve cross-border credit system and financial services, strengthen currency swap arrangements and establish a bilateral payment and settlement system.

 

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