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Money Matters

Embracing a brighter future

By Werner E Liepach
Mon, 12, 16

INSIGHT

Pakistan should see 2016 as a positive signal that a better and more prosperous future isn’t far away. Allow me to explain the reasons for my optimism.

First, according to the latest Word Bank publication on doing business, Pakistan is among the top 10 economies in the world when it comes to improving their business regulations in 2015-16, and better still Pakistan is the lowest ranked country to do so.

Pakistan has committed to a three-year road map to improve its global ranking and has already completed three reforms in registering property, getting credit and trading across borders. As a result, it improved its ranking from 148 to 144 out of 190 economies. The other nine economies in the top achiever group were Brunei Darussalam, Kazakhstan, Kenya, Belarus, Indonesia, Serbia, Georgia, the United Arab Emirates and Bahrain.

Second, Pakistan successfully completed a three-year programme with the International Monetary Fund (IMF) in September 2016 making it the first ever successful IMF programme in Pakistan. Pakistan has a very long history with IMF dating back to 1958. The country has embarked on 21 IMF programmes with none of them successfully completed, except the last one even though still with some notes. IMF managing director Christine Lagarde reminded Pakistan during her recent visit that growth must be more inclusive and the business climate must be improved to attract more investment and generate growth and employment.

Third, the government has just paid off the circular debt in the energy sector amounting to about Rs480 billion. It reflected the on-going energy crisis that has cost the economy more than two per cent of GDP annually. This is a very positive development that will boost investor confidence in the energy sector, especially if it is complemented by further steps in distributing electricity, targeting subsidies, and collecting tariffs to avoid the recurrence of debt problems. There is no doubt that the energy sector still faces a demand-supply gap, inefficiency and affordability issues that must be addressed.

Fourth, remittance inflows to Pakistan have provided foreign exchange earnings, supported the balance of payments, thereby contributing to the overall economy as well as improving the country's credit rating and helping migrant families. They have been the most stable source of foreign exchange, proving remarkably resilient in the face of the global economic slowdown, and have sustained poverty reduction efforts (a 10 per cent increase in workers' remittances lifts 1.3 per cent poor Pakistanis out of poverty).

South Asia has been the main source of Asian migrant workers, and receives the largest amount of global remittances. Pakistan receives the second highest amount after India, but its growth in inflows is the highest. Remittance inflows to Pakistan have generally been higher than foreign direct investment (FDI) and nearly 10 times more than official development assistance inflows. Without remittances, Pakistan’s current account deficit would be more than 10 percent of GDP, creating a serious balance of payment problem.

Finally, the economy has recently become a standout for stock pickers and has been re-admitted to the emerging stock market index, based on impressive economic growth and strong prospects.

The economy has been steadily improving over the past few years and is expected to grow faster in 2017 and 2018. Pakistan’s bullish growth prospects are one reason that Credit Suisse last year predicted it would be a top 20 global economy in the world by 2030. Current growth rates, however, are still lower than in nearby countries such as India and Bangladesh, and down on the government target of seven per cent per year.

More importantly, growth in Pakistan has translated into significant poverty reduction, not only for the ordinary poor (defined by the $3.10 per day poverty line) but even more so for the extreme poor (as defined by the $1.90 per day poverty line). Pakistan has managed to reduce extreme poverty from 72.4 per cent in 1981 to only 6.8 per cent in 2012, while for the ordinary poor the rate of poverty has declined from 91.0 per cent in 1981 to 42.0 per cent in 2012.

Only the People’s Republic of China (PRC) and Nepal performed better than Pakistan on poverty reduction over the same period. Even so, other social economic and demographic indicators in Pakistan have not been so positive, especially improvements in child malnutrition, primary school completion rates, youth unemployment, and gender gaps.

Overall then, the outlook for Pakistan’s economy is promising. In addition to Pakistan’s achievements in reviving growth, there are other developments happening within and outside its borders that should provide further impetus.

 

New trends

The first development is the emergence of trends domestically and abroad that should benefit Pakistan’s economy. Since the global financial crisis, growth momentum in developing Asia has fallen from an average of 8.3 per cent during 2006–2010 to 5.9 per cent in 2015. Yet, Pakistan has maintained its growth momentum due to factors including sustained macroeconomic progress and structural reform. The country has also improved its growth potential through its rapidly increasing working age population.

Expansion of Pakistan’s working-age population accounts for 64 per cent of the economy’s estimated potential growth, even though this demographic dividend will fade once the economy develops and the population starts aging. Low international food and fuel prices have helped bring inflation to a 47-year low of 2.9 per cent in 2016.

Moreover, the PRC’s transition from an export-led economy to one driven by consumption is shifting import demand from raw inputs to consumer products. Moreover, wage rises are moving some labour intensive manufacturing activities to lower-cost economies like Pakistan.

The second boost comes from the China-Pakistan Economic Cooperation Corridor (CPEC). Part of the PRC’s proposed 21st century Silk Road initiative, the $46 billion package of projects for Pakistan is the PRC’s ‘flagship project’ of the “One Belt, One Road” (OBOR). The planned investment amounts to about 20 per cent of Pakistan’s GDP and is larger even than its annual exports.

A successful implementation of CPEC will undoubtedly spur economic growth in Pakistan, where infrastructure has been underfunded by more than four per cent of GDP annually. About 61 per cent of the CPEC investment will be allocated to energy projects to bridge a supply deficit. Just over one-third of the investment will be devoted to other infrastructure, especially in transport and communication, where deficiencies cost the economy more than four per cent of GDP per year.

The OBOR is intended to promote exports and better international relations through total investment of about $900 billion in huge infrastructure projects along developing six corridors under two “roads”: The New Silk Road Economic Belt running west toward Europe through the Russian Federation and Central Asia; and the 21st Century Maritime Road to Europe through ports in South Asia and Southwest Africa.

The OBOR aims to connect the PRC with 60 countries, facilitating potential trade with 4.4 billion people. The estimated economic implications of this are enormous, and could boost the PRC’s GDP by 25 per cent. In addition to the six initial corridors, other planned corridors aim to connect the PRC to the Middle East, giving direct access to the Arabian Sea and energy-rich Persian Gulf markets.

The third growth trend is the emergence of economic corridors in South and Central Asia. Economic corridors facilitate business and distribution networks linked with production centres, urban clusters, and international gateways.

Economic corridors form a key part of the growth agenda in India, as well as in Central Asia through the Central Asia Regional Economic Cooperation (CAREC), which is spearheaded by ADB with the support of other multilateral institutions. Under CAREC, there are plans for six international corridors across the ten countries with two of them affecting Pakistan directly. There was more than $27.7 billion of investment in these corridors from 2001 through 2015, covering 166 projects in transport, trade facilitation and energy. This is in addition to $440 million in technical assistance projects.

Now is the ideal time for Pakistan to grasp the opportunities for growth provided by its own reform progress and new growth trends emerging from neighbouring countries and regions. Being strategically located close to the world’s fastest growing economies, there is no reason Pakistan can’t benefit from this golden opportunity.

Certainly, there are many challenges still to overcome. Security concerns persist, as do the structural factors underlying Pakistan’s ongoing energy crisis. The tax base needs broadening given that tax revenue totals only about 10 per cent of GDP. Improvements are needed to boost domestic and foreign direct investment, as well as enhanced productivity and competitiveness and upgrading the infrastructure and social service delivery.

Another pressing issue is the recent alarming research showing that 22 percent of Pakistan’s population is undernourished. This calls for a significant reform of the agriculture sector, which provides livelihoods for most of the country’s poor and low-income population. Agriculture output declined by 0.2 per cent last year due to a 28 per cent drop in the cotton crop, while steeper global competition has hurt exports.

It’s time for Pakistan to start catching up with more dynamic neighbours. Graduation from the IMF and plaudits from global financial markets are helpful, but Pakistan cannot afford complacency.

It must continue the reform process and avoid distractions such as politically motivated pre-election spending. If that happens, its finest days may be yet to come.

The writer is ADB’s Country Director in Pakistan. The views expressed are his own