In recent years, Pakistan’s equity market has outperformed its regional rivals in China and India by a big margin despite poor security conditions at home and worse-than-regional key macro-economic indicators, according to Forbes magazine.
The magazine’s endorsement of the Pakistani market must have cheered up the Nawaz Sharif government, struggling to deliver on its election promises, such as ending rolling blackouts, in the face of a political challenge by the rival Pakistan Tehrik-i-Insaf.
Such endorsements by foreign institutions and media are often touted by the government as a ‘success certificate’ of its economic and financial policies. What the government and its supporters tend to conveniently overlook, or downplay, while flaunting ‘international approvals’ are the ‘words of caution’ that often accompany these endorsements as footnotes.
The country’s economy is in a much better shape now than it was over three years ago …The IMF feels that the economy has now reached a position where it will be able to absorb mild shocks
The country’s economy is indeed in a much better shape now than it was before the PML-N came to power over three years ago. It has picked up momentum and growth has escalated to an eight-year high of 4.7pc. Inflation is at its lowest in decades and is expected to remain much below the target of 6pc for the present year.
The current account deficit has been significantly reduced to an average 1pc, from 4pc, and the fiscal gap has been almost halved to 4.3pc from 8.2pc of GDP. Remittances sent by Pakistani workers from across the world have peaked to $19.90bn from $13.9bn, and foreign exchange reserves have doubled and are good for the five-month import bill of the country. The IMF feels that Pakistan economy has now reached a position where it will be able to absorb mild shocks.
But that is that. Little has been done so far to restructure the economy on a sustainable growth path as is reflected by sliding exports, failing agriculture and a collapsing power sector. Private investment is still depressed despite the interest rate of 5.75pc being at its lowest in 46 years. Pakistan remains a frontier market in the eyes of foreign investors with risks outnumbering positive developments as is indicated by falling FDI over the years.
Exports have dropped by a fifth in three years. And this downward journey continues unhindered with the country’s overseas shipments going down by 8.19pc and imports rising by 10.32pc in the first two months of the ongoing fiscal, to August from a year ago. The trade gap has, thus, widened by over 27pc, wiping out benefits of low global oil prices and growing remittances.
Several domestic and international factors are responsible for the continual drop in exports, especially textiles. No doubt, the slowdown in global demand is one major reason for the falling exports but a cursory look at the increasing share of India, Vietnam and Bangladesh in global textile trade shows that our textile products, which fetch 55-60pc of export revenues, have been priced out in the international market because of an appreciating exchange rate, power shortages and the myriad taxes on exporters.
“(Smaller) textile mills are under stress and closing down. Larger groups are holding up but it is only matter of time that some of them also start caving in, unless problems restraining the sector’s growth are resolved,” Mian Mohammad Mansha, chairman of the Nishat Group of Companies, had told the writer last month.
Others agree. “It is crucial for policymakers to support the country’s export sector in order to accelerate overall economic growth in the near to medium term, protect jobs and reduce pressure on forex reserves, as large foreign debt payments become due over the next few years,” Ali Khizar, an economic analyst, argued.
Pakistan is to repay an average $5bn a year in foreign debt payments until 2020, according to the central bank. Saad Khan, a financial analyst at Arif Habib Securities, says forex reserves could drop from the present $22bn to $17-18bn because of higher machinery imports, falling exports, stagnating remittances and debt repayments by the end of the present financial year.
“An increasing machinery import bill on account of CPEC power projects and corporate expansion plans will bring some pressure on reserves, but it will fuel growth — though in the long run.”
Farmers feel that agricultural growth will remain subdued for many years because the government has failed to implement structural reforms in this sector.
“The food import bill will rise over time because farmers are under enormous stress owing to high production costs, water shortages, lower international commodity prices and changing climate patterns,” Rao Ijaz, a grower from Bahawalnagar, said.
“Little is done to prepare agriculture to meet future challenges.”
Last but not least, the government’s planned power sector reforms seem to have fallen through. With its focus on maximising generation before the next elections, it has totally ignored issues like high system losses, improving bill recovery from users and privatising distributions companies. Many private power producers doubt the government claims of achieving its generation target.
“Even if the generation target is achieved, it will have an uphill task of taking power to the doorsteps of users, as well as controlling loss and theft, and recovering bills in full that add to generation costs and make electricity enormously unaffordable for consumers,” said a private power producer.
Asad Zaman, vice-chancellor of the Pakistan Institute of Development Economics, doesn’t agree with critics of the government policies and believes that the economy is in great shape with the twin deficits under control, inflation down, interest rates at their lowest in many decades, and forex reserves at a historic high.
“The economy is growing rapidly as domestic and foreign private investment is pouring in. With the IMF programme out of the way the government is thinking of ways to increase public development spending. Actually, we can exceed the growth target for the current year if we push a little harder.”
But can we