‘Economic policies led to high public debt; inadequate resources’

LAHORE: The Institute of Policy Reforms (IPR) has said in its quarterly review published Friday that the present economic 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. 

It pointed out that for the last two years, Pakistan’s “exports have been in free fall”. It called for a proactive and concerted effort to arrest the trend. This is critical to improve long term fundamentals of the economy and to reduce Pakistan’s external vulnerability. IPR said higher imports to improve power supply and for servicing of external debt have increased the economy’s forex needs. The report fears that after years of growth, overseas remittance may have begun to decline.

Agriculture production has improved after last year’s dismal performance. 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 percent, while the year’s target is 1.5 percent of GDP.

The Federal Board of Revenue (FBR) tax collection and federal government revenue grew by four percent and three percent, respectively. This is on top of the unprecedented increase of 20 percent during 2016-17. On the other hand, expenditures have remained within proportionate budget. In fact, development spending is lower than the first quarter last year.

The report states that quick fixes will not help with the growing twin deficits and signs of medium term external vulnerability. They require structural reforms through major policy changes. Without much needed reforms, the economy will continue to perform within a band of low to moderate growth, the IPR review said. Public debt will continue to rise as revenues stay well behind needs. Export growth too will remain uncertain.

“Our 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 mark up in the country, the government has increased short-term debt while reducing long-term borrowing,” the report added.

Of the factors that increase productivity, infrastructure will improve in the coming years, largely from China-Pakistan Economic Corridor. However, there is need for urgent action to upgrade skills, improve R&D as well as governance.

Reducing the social deficit will provide better workers for the factory floors, in offices, and better entrepreneurs. By not doing so, Pakistan has missed out on a large part of its potential. It will also reduce poverty in the country. Savings and investment remain modest. Also, last year, private investment fell from 10.2 percent of GDP in 2014-15 to 9.8 percent in 2015-16. 

The review further adds that sustained growth will depend on improved performance of commodity producing sector, agriculture and industry. Within this, power supply and manufacturing are of special importance. Growth of four percent in year on year power supply is lower than GDP growth rate. However, this is likely to improve soon, it predicts.  

Development expenditure remains encumbered in the deeper issues of project selection, transparent procurement, and effective project management. Improvement is needed in these areas to maximise returns to the economy. Also, public investment is well below needs.