Money Matters

Dreaming big

By Ihtasham Ul Haque
Mon, 02, 17


Pakistan’s GDP growth rate has not been as great as the policy makers and the government had hoped for, and has not surged to 4.5 percent, but it is certainly up from the consistent 2.5 to 3 percent witnessed till 2013. Whether the government will achieve the 4.5 percent to 5 percent growth, as has been said on countless occasions, is still something to be witnessed.

Achieving higher GDP growth rate is linked to significant improvements in the economic governance, as well as overcoming the security challenges, both of which can help the government in accomplishing the desired and sturdy development outcomes.

The officials of the central bank maintain that the five year predicament of ‘low growth and high inflation equilibrium’ is no more, and Pakistan is all set for the revival of the growth process, which started in 2016 after the tide changed in 2015. 

But there are not many takers of this claim. Many believe that without improving the decaying infrastructure and removing existing economic malaise by ensuring essential structural reforms in the key sectors, including energy and taxation, the dream of achieving a significant GDP growth rate may not come true.

In the first place, better growth prospects may be marred by the creeping tax exemptions, which are now again being seen; and are estimated to be close to Rs200 billion. This will naturally culminate in reducing taxes. The government had earlier withdrawn Rs477 billion exemptions.

Under the International Monitory Fund (IMF) programme, Rs330 billion exemptions were alone removed during the three-year Extended Fund Facility (EFF). New exemptions are reportedly being offered to road projects and Thar coal-based power projects that had been planned and are now being executed under the China-Pakistan Economic Corridor (CPEC).

Now that the international oil prices have started surging once again after remaining very low till November 2014, unanticipated fiscal consequences have started worrying the officials of the ministry of finance and the State Bank of Pakistan (SBP), making their job difficult to ensure 5.2 percent GDP growth rate during 2016-17.

It is said that going gets tough as the luxury windfall saving of an annual $6-7 billion on account of decreased international oil prices is not available anymore.

World Bank, IMF and other multilateral agencies as well some international publications have been saying that the Pakistani economy remained stable during the  last three years, but has it moved beyond stabilisation, is still being discussed in the relevant quarters.

Multilateral agencies do say that a range of governance and business environment indicators have to be improved to unleash Pakistan’s real growth potential. Improved economic growth was witnessed due to unprecedented low oil prices, in that light, much could have been done to manage higher growth rate in Pakistan.

The sluggish growth in tax earnings particularly unravelled the macroeconomic stabilisation programme after the IMF three year $6.6 billion EFF ended in September last. This has prompted questions as to why the government put the IMF’s prescribed reform agenda on the back burner.

The improved GDP growth was also marred by serious haemorrhaging in the state sector enterprises which are still incurring over Rs400 billion losses every year.

A GDP rate of 6.5 percent was possible, if the fiscal side improved by halting revenue shortfalls and support to the agriculture sector, which continued to be under stress.

Value-added exports, progressing large-scale manufacturing and increasing private investment could have also played their role in achieving better GDP growth. Manufacturing sector’s growth at 2.9 percent has slowed down essentially due to shortage of power and gas as well as higher tariff.

Insiders say that while economic growth is showing some signs of recovery due to the stable international commodity and oil prices, over borrowing, both internal and external, have widened the fiscal and current account deficits.

The government went insensitive because of the $46 billion CPEC project which would certainly go a long way in achieving 9-10 percent growth rate over a longer period of time. But in the intervening period, without effectively refining macroeconomic indicators - by removing distortions from the taxation system and implementing IMF prescribed or home grown structural reforms in key sectors - it would be a far cry to achieve the desired GDP growth rate. Allegedly there is too much focus on CPEC projects which are being executed without serious transparency.

One of the major objectives of enhanced GDP growth rate is to provide jobs, especially to the increasing number of educated youth. This will help the government to alleviate poverty. Since there is no sufficient private investment, excluding that of CPEC, and no new government investment in public sector, the job market is painting a very dismal picture.

Low human development indicators are undermining the country’s labour force productivity and economic growth. Unemployment has surged to a 13 year high at eight percent, while youth unemployment rate increased to over 11 percent by 2014-15.

For better GDP growth rate, experts believe that industrial performance has to be geared up, while the services sector needs to grow led by the financial sector. The government is relying on substantial automobile sales, increased port activity and higher telecom profits, although wholesale and retail trade has yet to improve. 

Finance minister Ishaq Dar’s detractors would not post a 5.2 percent GDP growth by the end of the current financial year. They do not acknowledge rapid improvements in the government’s major economic indicators as the large scale manufacturing (LSM) is stagnating at two percent growth rate for the last six months; the private sector is still shy and borrowing little to expand their businesses, despite the fact that the commercial banks are full with liquidity and interest rate environment has never been so benign; tax collection has simply collapsed, unemployment situation is worsening by each passing day, and government’s borrowing of the central bank has returned with full vengeance.

Exports, home remittances and foreign direct investment (FDI) are on the decline. First six months of the current financial year witnessed 35.5 percent reduction in FDI, while debt is on the rise and foreign exchange reserves have gone down by $565 million in two months (between October to December last year).

The government had been trying to stabilise the economy through austerity which means that growth did not receive much attention during the first two years, resulting in more unemployment. The objective was also to contain fiscal deficit for which the ministry of finance had been refusing full development funds to the ministries and provinces. At the same time, exporters were denied of over Rs150 billion sales tax refunds, which were meant to cut fiscal deficit that had been one of the major conditions of the IMF.

But who does not know that tight fiscal policy reduces public investment which in other words means no attention on growth. That is why the government had been accused of implementing anti-growth policy on the dictates of the IMF. Resultantly, there was no new public investment, and rather cuts were applied to the development budget which has critically impaired Pakistan’s medium term to long term growth prospects.

Over the years, the entire focus on stabilisation has proved to be counter-productive, which was why when G-20 leaders met in Moscow on July 20, 2013, they agreed to go for course correction by putting their economies on a job-rich growth path.

Way forward is to move on the stabilisation path and simultaneously achieving key developmental goals by ensuring higher allocations and adequate public and private investment to spur growth. This policy may increase fiscal deficit and public debt but that will be sustainable, provided there is certain check on government spending.

Balancing the budget by narrowing down gaps in income and expenditure is desirable. It will certainly pay off in terms of improving the lot of the common man’s suffering due to ill-conceived policies of successive governments. This seeks accountability to guarantee financial discipline which does not seem to be adhered by political governments that are often hostage to MNAs, MPAs and Senators, first skilfully bribed by late dictator Zia ul Haq in the name of development funds.

The writer is a senior journalist based in Islamabad