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January 1, 2015

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Oil price plunge gives Pakistan breathing space

Pakistan has obtained a breathing space in the wake of steep decline in prices of petroleum products in the international market, which will ease down fiscal woes of the country over the short-term.
The windfall gains obtained through reduced oil prices will not last long in 2015, if structural bottlenecks of the economy such as energy outages, security concerns and revenue mobilisation are not resolved.
The real concern for the government will be continuous trend of low GDP growth again this year, as despite tall claims the real GDP growth will not be able to cross four percent of GDP against the envisaged target of 5.1 percent for 2014/15.
Last year growth of 4.1 percent will be revised downward in accordance with the annual revision, but this low base will not help jack up growth figure for the ongoing fiscal year up to the desired level of the economic managers mainly because of bad performance of agriculture and manufacturing sectors.
It clearly indicates there will be job opportunities for new entrants in the labour market and prevalence of poverty will continue to rise during the calendar year 2015.
Another challenge for the government during 2015 will be keeping the International Monetary Fund (IMF) programme on track after completion of the sixth review, which was scheduled to be completed by the end of February or early March, 2015.
The IMF had largely recovered its previous loans, which it provided to Islamabad under the PPP dispensation. Now the net inflows are going to start and the phase of tough conditions will also be gauged by the IMF from the second quarter (April-June) period of the ongoing fiscal year 2014/15.
But experts said the breathing space obtained by Islamabad in the aftermath of reduction in POL prices would go a long way in keeping the IMF programme on track over the short-term and this incumbent regime would be able to manage completion of the next review (sixth review) of the IMF programme without facing much

difficulty.
The fiscal side of the economy is real problematic area in the wake of expected shortfall in the revenue collection of the Federal Board of Revenue (FBR). The government had envisaged annual tax collection target of Rs2,810 billion and the IMF had already projected downward revision from Rs2,810 billion to Rs2,756 billion. However, economists say the FBR’s tax collection will stand at the maximum of around Rs2,550 to Rs2,600 billion.
In order to bridge the gap, the government has jacked up the general sales tax (GST) rate from 17 percent to 22 percent on POL products in order to offset the revenue losses because of reduction in oil prices in the international market.
The subsidy to the power sector will also decline because of falling prices of the furnace oil so it will help curtail the budget deficit close to the level agreed with the IMF for the current fiscal year.
The interest rates are on the declining trend in the wake of decreasing inflation because of base effect in the same period of the last fiscal year, but it will rebound in the second half (January-June) period of the current fiscal year because of the possible upsurge in the energy prices. But inflation on an average will remain around seven percent so the discount rate will also come down.
“In the wake of possible reduction in the interest rates, Pakistan’s debt servicing will be scaled down by Rs120 to Rs130 billion during the current fiscal year on account of both external, as well as domestic loans,” official sources said.
However, the government would be able to get savings in debt servicing and subsidy amounts, which will compensate the FBR’s shortfall. If need arises, then the development budget will be slashed down in order to keep the budget deficit at around five percent of GDP.
Finance Minister Ishaq Dar had managed external front of the economy by keeping the IMF programme on track that resulted in touching the foreign exchange reserves of $15 billion mark in December 2014, as Islamabad got $1.1 billion from the IMF, as well as successfully launched Sukuk bond worth $1 billion.
Now the balance of payment crisis is over for the short- and medium-term after increasing the foreign currency reserves and expected saving in the import bill to the tune of $4 billion, but the worrisome indicator is declining trends in fetching exports of Pakistani made-ups, which would become headache for the economic managers on the long-term basis.
There is a silver lining on the economic front, as well. If Islamabad manages to attract committed Chinese investment of over $40 billion and start moving towards materialising projects under China-Pakistan Economic Corridor (CPEC), it can boost the sluggish economy of Pakistan.

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