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January 12, 2017



Analysts warn pre-election populist decisions can derail economy

KARACHI: The government’s soft-pedalling on the reforms it had promised four years back showed the economy is no more a priority ahead of 2018 polls as it offered a number of politically motivated incentives/amnesties to reflate the growth, analysts said on Wednesday, warning further stimuli will only put pressure on the country’s fiscal account.


“This is the pre-election year and the government needs policies and decision to strengthen its vote bank. Therefore, I do not see a tax-heavy budget or any significant rise in petroleum prices going forward,” Khurram Schehzad Chief Operating Officer at JS Global Capital said.

“We see slippages on the expenditure side vis-à-vis foreign debts even if the government opts for productive populists decisions such as the Rs180 billion export package announced quite recently.”

He explained that even if the government opts for infrastructure development alone or announces support packages for industry, the foreign/domestic debts are the only source to fund the same.

“Pakistan’s current account remains sensitive as a couple of repayments are due this year, while foreign direct investment (FDI) is low and export market has become quite competitive translating into limited support from export receipts,” Schehzad said.

He also pointed up the fact the Pakistan Muslim League-Nawaz (PML-N) regime is strained under unsuccessful tax amnesty schemes, while the collection targets remain grossly missed and now, another such reprieve is in the offing but it’s no use pinning hopes on any.

“Amnesty would not yield results unless availed. Besides, such decisions discourage honest taxpayers,” Khurram Schehzad added. Giving his viewpoint, Khawaja Amjad Waheed, CEO of NBP Fullerton Asset Management (NAFA) said,” The fiscal targets for the current year are set to be missed.”

“The targets will not be met due to slippages on the expenditures side amid higher spending by federal and provincial governments before next general elections scheduled in early 2018, no IMF oversight and government’s reluctance to implement further revenue mobilization measures because of election considerations”.

A report issued by Elixir Securities highlights several macro-economic challenges such as higher fiscal slippages on account of populist measures prior to election year, monetary tightening, resurgence in commodity prices, external account pressures emanating from surging current account deficit, flattish remittances and upcoming debt repayments.

On the external account front, Khawaja Amjad Waheed expects the current account deficit to widen in fiscal year 2016-17 due to higher imports especially plant/equipment and energy-related machinery, subdued exports and stagnating remittances.

“However, an overall balance of payments position is likely to remain comfortable on account of higher external loan inflows and some increase in FDI. Nonetheless, if remained unaddressed, the sluggish exports would eventually pose serious risks to medium-term balance of payments sustainability and threaten the recent economic gains”.

Ahmed Lakhani at JS Global Capital says a significant portion of an export package worth Rs180 billion was directed towards boosting the sector’s competitiveness, while its market share was constantly being gnawed away by the likes of Bangladesh and Vietnam with pro-export policies by their respective governments.

“To counter this trend, the government has provided a number of incentives to the textile sector, which will significantly benefit textile exports.” Taking a similar line, Arslan Hanif at Arif Habib Limited said,” The much awaited export package should help exporters reduce their cost of doing business and compete against regional peers.” 

“The textile package is a positive for the textile manufacturers and will push exporters to bring in additional USD proceeds, resulting in higher FX reserves in turn helping the USD/PKR dollar parity to remain stable.” However, analysts are unanimous that the looming macro-economic challenges are manageable and prospects for the domestic economy look upbeat in 2017.

Just to jog your memory, Pakistan’s economic performance has remained fairly robust in 2016 mainly supported by the favorable global economic environment and partially due to some economic reforms measures undertaken by the government under the IMF program.

Gross Domestic Product (GDP) growth reached an eight year high of 4.7 percent; external account position remained comfortable, as captured in healthy foreign exchange reserves accumulation though primarily on the back of fresh loans and a stable exchange rate; inflation averaged at around 3.7 percent during 2016 mainly helped by the steep fall in global oil prices, which allowed central bank to continue with its accommodative monetary policy; and fiscal deficit stayed contained, narrowing to 4.6 percent of GDP during the last fiscal year.