Lahore - The country requires structural reforms through major policy changes as without it the economy will continue to perform within a band of low to moderate growth.
Public debt will continue to rise as revenues stay well behind needs. Export growth too will remain uncertain.
The exports must reduce dependence on textiles and apparels and, more importantly, change the strategy from competing on price to product differentiation.
The economy’s fundamentals remain uncertain and there is no indication of increase in productivity.
In a period of low markup in the country, the government has increased short-term debt while reducing long-term borrowing.
These views were expressed in a report issued by the Institute for Policy Reforms.
The report has called for a proactive and concerted effort to arrest the declining trend in exports, as it is critical to improving long-term fundamentals of the economy and reducing Pakistan’s external vulnerability.
The report reminds that higher imports to improve power supply and for servicing of external debt had increased the economy’s forex needs.
Exports declined 8% in 2014-15, a further 12.5% in 2015-16, and again by 9% in the quarter under review. During the quarter, imports grew by 10 percent and the fiscal deficit expanded by 29 percent.
In a troubling development, the report fears that after years of growth, overseas remittances may have begun to decline. Though it is yet early to confirm this.
Agriculture production has improved after last year’s dismal performance.
Production of cotton grew by 18 percent. It fell by 30 percent last year. Other major crops have recovered.
However, against the target growth rate of 5.9 percent for 2016-17, year-on year LSM grew by 2.3 percent for the first quarter. Production declined in a number of major industries, including textiles. During the quarter, the amount of private credit decreased compared to last year.
First quarter results show worsening of both fiscal and current account deficits. Fiscal deficit was 1.3 percent of GDP for the quarter against a target of 3.8 percent for the year. Current account deficit was 1.1%, while the year’s target is 1.5 percent of the GDP.
FBR’s tax collection and federal government revenues grew by 4 percent and 3 percent respectively.
This is on top of unprecedented increase of 20 percent during 2016-17.
On the other hand, expenditures have remained within the budget.
In fact, development spending is lower than the first quarter last year.
Last year, ratio to GDP was well below target level. While targets for the current fiscal year too are the same, There is no new policy in place to achieve them.
The government must lead a concerted effort to reduce its negative savings. Also, last year, private investment fell from 10.2 percent of GDP in 2014-15 to 9.8 percent in 2015-16.
Sustained growth will depend on improved performance of commodity producing sector, agriculture and industry.
Growth of 4 percent in year on year power supply is lower than GDP growth rate. However, this is likely to improve soon. Import of power generation machinery has increased greatly.
In 2015-16, Pakistan imported power generation machinery worth $1.8 billion. Since then, the country has imported an additional $795 million worth of machinery imported during the first quarter.
Pakistan is expected to approach target of increasing power generation by about 13,000 MW by 2018 to 2020, including 10,700 MW under CPEC.
Figures for the imports of other machinery show an overall revival in industry. These imports are apparently financed by debt as FDI is still low.
However, for sustained growth, the economy will need more than just machinery imports.
Development expenditure remains encumbered in the deeper issues of project selection, transparent procurement, and effective project management. Improvement is needed in these areas to maximize returns to the economy.
Also, public investment is well below the needs.
It is critical also that the government reviews the political economy. This is most obvious in both tax policy as well as in expenditure preferences.
Present policies have led to high public debt and inadequate resources for public investment.
Overall, the economy needs an urgent and effective response to the constraining structural issues.