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2016 witnessed lowest inflation in 47 years: Finance Ministry

By Hanif Khalid
October 26, 2017

ISLAMABAD: The Finance Ministry spokesman on Tuesday had a candid talk with the Jang Group, answering questions on the state of national economy, and said Pakistan today is better than what it was in 2013. 

The growth rate has reached a decade high level of 5.28 per cent while in June 2013, it stood at 3.68pc. Pakistan has seen a visible economic turnaround over the last four years due to the successful implementation of a comprehensive programme of economic reforms aimed at higher economic growth and macro-economic stability. 

The spokesman gave his frank opinion on subjects like debt issue, situation with regard to exports, revenue collection and other areas.

When asked to comment on factors leading to better GDP growth, the spokesman replied that the government has initiated pro-growth reforms in agricultural and industrial sectors. In addition, higher infrastructure spending, improved law and order situation and historic low interest rates have provided much-needed support. Higher growth was achieved because of broad-based performance in agricultural, industrial and services sectors, which was recorded at 3.5, 5.0 and 6 per cent, respectively, in FY 2017.

To a question about the performance of the Large Scale Manufacturing (LSM) sector in industrial growth, he replied that the LSM sector posted a phenomenal growth of 5.68 per cent in FY 2017. This trend has continued in the current fiscal year as LSM recorded a growth of 12.98 per cent in July 2018, which is highest in the last 12 years. The spokesman explained that for FY 2018, the overall GDP growth target is 6 per cent.

On the basis of growth in LSM and better performance of important crops in the agriculture sector, it is expected that the growth target will be achieved during FY 2018. In addition, the agriculture credit disbursement has increased from Rs 336.3 billion in FY 2013 to Rs 704.5 billion in FY 2017. For FY 2018, it is targeted at Rs 1 trillion. In July-August 2017, the agriculture credit disbursement was 37 per cent higher compared with the same period of last year.

To another question, the spokesman said the size of GDP in FY 2013 was $231 billion which has increased to $304 billion in FY 2017, showing a growth of 32 per cent.

Responding to a query on present level of inflation, the official replied that due to effective monetary and prudent fiscal policies, along with better monitoring of prices and supplies of commodities at federal and provincial level, inflation has been contained at 4.16 per cent in FY 2017 compared to 7.4 per cent in 2013. During the first quarter of the current fiscal year, inflation remained at 3.39 per cent compared to 3.86 per cent in the corresponding quarter of last fiscal year. He said FY 2016 witnessed the lowest inflation in 47 years. 

In response to a question regarding revenue collection by the FBR in 2017, the spokesman said the FBR tax collection increased from Rs 1,946 billion in FY 2013 to Rs 3,368 billion in FY 2017, registering an overall growth of around 73 per cent. The FBR tax collection posted an impressive growth of 20.6 per cent in July-September 2018 despite Rs 41 billion sales tax refund payments and stood at Rs 765.118 billion compared to Rs 634.223 billion in the same period of last year. The overall tax-GDP ratio has reached 12.5 per cent in FY 2017 compared to 9.8 per cent in FY 2013.

On the state of fiscal deficit, the spokesman said the fiscal deficit has been reduced to 5.8 per cent of GDP in FY 2017 from 8.2 per cent of GDP in FY 2013. During the first quarter of FY 2018, the deficit has been contained at 0.9 per cent of GDP compared to 1.3 per cent of GDP during the corresponding quarter of last year. He said despite Kissan package, export package and zero-rating of export-oriented sectors like textile, sports, leather, surgical instruments and carpets, the fiscal deficit has been contained. 

The spokesman, on the query that the fiscal deficit has been reduced but how about the trend in the development budget, stated that in June 2013 the federal PSDP was Rs 348 billion which increased to Rs 733 billion in FY 2017. In FY 2018, it has been increased to Rs 1,001 billion. 

When his attention was drawn to the criticism that direct taxes are decreasing and indirect taxes are increasing, he opined that the share of direct taxes in total taxes has increased over the years. In 1990-91, direct taxes were just around 20 per cent of total taxes which subsequently grew to 31.1 per cent in 2004-05, 38.2 per cent in 2012-13 and 39.1 per cent in 2015-16.  In FY 2016-17, the share of direct taxes reached 40 per cent and it has become the single largest tax collected by the FBR. The government is focused on further increasing the share of direct taxes through various policy and administrative reforms including broadening of tax base.

A substantial progress has been made in the efforts to bring potential taxpayers in the tax net during the last four years. As a result of these efforts, the number of income tax return filers, which was around 766,000 in 2012, has risen to over 1.27 million in 2016 and would further increase in coming years. In the tax year 2017, the number of tax returns filed by taxpayers till 20th October has been recorded at 406,310 compared to 192,059 for the corresponding period of 2016. In addition, the social protection programme is also growing as the allocation under the BISP increased from Rs 43 billion in FY 2013 to Rs 115 billion in FY 2017, and further increased to Rs 121 billion in FY 2018. The number of BISP beneficiaries has increased from 3.7 million in FY 2013 to 5.4 million in FY 2017, and during FY 2018, it will reach 5.6 million. The government has launched a biometric system to avoid ghost elements. The quarterly cash grant has been gradually enhanced from Rs 3,000 per family in FY 2013 to Rs 4834 in FY 2017.

In response to another question, the spokesman replied that the Credit to Private Sector (CPS) witnessed an expansion of Rs 748 billion during FY 2017 against the decline of Rs 7.6 billion in FY 2013. In addition, the incorporation of companies has increased from 3,960 companies in 2013 to 8,286 companies in 2017. During the first quarter of FY 2018, 2,432 more companies were added against 1,485 companies during the same period of last year, showing a growth of 64 per cent. This indicates that the economy is moving on a sustainable growth path.

Regarding a question on Balance of Payment, the spokesman explained that Foreign Direct Investment (FDI) inflows increased from $1.45 billion in FY 2013 to $2.73 billion during FY 2017, posting a growth of 87.4 per cent over the last four years. In July-Sep 2018, the FDI increased by 56.3 per cent. Remittances increased from $13.92 billion in FY 2013 to $ 19.35 billion in FY 2017 and registered a growth of 39 per cent. In July-Sep, 2018, overseas Pakistanis remitted $4.790 billion as compared to $4.740 billion received during the same period of last year, thus going higher by 1.05 per cent during the first quarter of the current fiscal year. Due to recession in GCC and Saudi Arabia, demand for migrants has slowed down.

On performance of exports in FY 2017 as compared to FY 2013, the spokesman said that in FY 2013, total exports were $25 billion, which decreased to $22 billion in FY 2017. The decline in exports was due to slow economic growth of Pakistan’s trading partners, which has now started picking up as the global economic environment has started improving. According to the recent data, exports during the first quarter of July-Sept 2018 increased by 12.4 per cent as compared to 5 per cent decline in exports in the comparable period of FY 2017.

Responding to the criticism that imports have been on the increase lately, the spokesman said imports were $40.2 billion in FY 2013, which increased to $42 billion in FY 2014, while in FY 2016, these were recorded at $41 billion. However, in FY 2017, they grew to $48 billion. The rise in overall import payments was mainly driven by high imports of power, textile, construction and agricultural machinery on account of increasing economic activities. In FY 2013, the import bill for machinery was $5.7 billion, which increased to $11.8 billion in FY 2017 that shows expansion in economy and productivity. In addition, load-shedding is also decreasing. Construction activities are increasing and due to better energy supply, industries are performing well. Consequently, employment opportunities are increasing. Likewise, per capita income increased by 22 per cent to $1629 in FY 2017 from $1334 in FY 2013.

When the spokesman’s attention was drawn to a report criticising government’s performance regarding utilization of project loans, he said the report does not portray facts as they actually exist. To assume that commitments be disbursed immediately and to classify them as unspent amounts based on inefficiency is not appropriate, rather misleading, as the funds do not remain unutilized. Rather, they are to be employed during the commitment period, i.e. from 2015 till 2020-2023. The spokesman said that on average, 25-33pc disbursements are made annually depending upon implementation period of the portfolio. He added that as of September 2017, the World Bank has disbursed $2.2billion out of an allocation of $ 5.4 billion and the portfolio disbursement stands at around 40pc. Similarly, the ADB has disbursed $ 1.9 billion out of an allocation of $ 5.8 billion and the portfolio disbursement stands at 32pc and for China, $4 billion stand disbursed against an allocation of $9 billion and the portfolio disbursements stand at 44pc. Since development partners make performance-based allocations (PBA), a trend showing enhanced commitments and allocations has been observed and future commitments are being enhanced significantly.

On investment environment, the spokesman said it is also improving. Investments increased from Rs 3348 billion in FY 2013 to more than Rs 5,000 billion in FY 2017, showing a growth of 50 per cent in four years. In terms of GDP, investment has improved from 14.96 per cent in FY 2013 to 15.78 per cent in FY 2017. Given the higher PSDP spending, investment will further increase in the coming years.

The spokesman said that the total government debt stood at Rs 19,634 billion at end-June 2017, which is 61.6 per cent of GDP. The public debt shall be reduced to 60 per cent of GDP by 2017-18 under Fiscal Responsibility and Debt Limitation (FRDL) Act. The total government debt to GDP ratio was 79 per cent and external public debt to GDP ratio was around 50 per cent in 2001. Of total public debt, the net domestic component was Rs 13.1 trillion and the external component was Rs 6.6 trillion. In terms of GDP, external public debt reduced from 20.8 per cent in FY 2016 to 20.6 per cent in FY 2017, while the domestic debt increased from 40.5 per cent of GDP in FY 2016 to 41.1 per cent in FY 2017. In 2001, the external debt was 56.7 per cent of the total debt, which decreased to 33.4 per cent in June 2017.

When asked if the total external public debt stands at $82 billion, the spokesman negated the contention and said that external public debt increased from $48.1 billion in June 2013 to $62.5 billion in June 2017 while the total external debt and liabilities increased from $60.9 billion in 2013 to $83 billion in 2017. He added that the total external debt and liabilities include debt of other sectors (private sector, bank borrowing) which are not part of public debt since the government is not liable to pay these obligations. He said the government retired around $17 billion till June 2017, mainly of loans contracted by the previous government.

On the government policy to reduce debt burden, the spokesman said the government efforts are reflected in the recent amendments to the Fiscal Responsibility and Debt Limitation (FRDL) Act which was approved by the parliament to maintain public debt levels within prudent limits. Accordingly, the public debt shall be reduced to 60 per cent of estimated GDP until 2017-18, and thereafter a 15-year transition has been set to bring down debt-to-GDP ratio to 50 per cent. Importantly, the external public debt repayment obligations for Pakistan are in the range of $4 billion to $4.5 billion per annum in the medium term, which is not a matter of concern as the government has successfully met higher repayment obligations even with much lower volume of foreign exchange reserves.

Pakistan’s foreign exchange reserves are at comfortable level. The foreign exchange reserves were at the lowest level at $7.58 billion in February 2014, of which SBP reserves were $2.83 billion and commercial banks’ reserves were $4.75 billion. On October 13, 2017, forex reserves reached $20.05 billion.

To another question related to the outlook of economy, the spokesman replied that due to improved security conditions on account of Zarb-e-Azb and Raddul Fasaad, along with growth-oriented policies, Pakistan will achieve higher, inclusive and sustainable growth.

Answering the question whether debt is bad, the spokesman replied that the developing countries need debt for investing in high-return projects for placing the economy on a long-run high growth trajectory. According to an IMF report, the developed countries like US, UK and Japan also carry debt and maintain levels as high as 80 to over 100 per cent of their GDP, well above Pakistan’s debt to GDP level. Even in the developing countries peer group; Egypt, Sri Lanka and India carry higher debt to GDP levels than Pakistan. Egypt’s debt to GDP ratio is 93.6 per cent, Sri Lanka’s debt to GDP ratio is 79.5 per cent and India’s debt to GDP ratio is 67.7 per cent. It is important to understand that the global debt to GDP ratio increased by about 8 per cent while Pakistan witnessed a marginal increase of 1.4 per cent (from 60.2 per cent in 2013 to 61.6 per cent in 2017) (Source IMF World Economic Outlook).

In response to a supplementary question, the spokesman replied that not only Pakistan but India, Indonesia and Sri Lanka have also witnessed drop in their exports due to recession. The since global economic environment has started improving as per WEO IMF. The global economic outlook improved from 3.1 to 3.5 per cent. It is expected that Pakistan’s exports will continue to increase.

When asked, given the fact that the government had cleared the circular debt soon after assuming responsibilities, why has it reportedly increased to Rs 800 billion, the spokesman replied that the figures are not correct. The circular debt is not Rs 800 billion, it is less than Rs 400 billion, while Rs 400 billion parked in PHPL are not part of circular debt.

With regard to exchange rate devaluation, the spokesman said there is no plan of devaluation as the economy is growing and foreign exchange reserves are at an adequate level, the exchange rate is stable, exports have started picking up, FDI is improving and other economic indicators are positive. The spokesman concluding the discussion emphasized that consistency and continuity in policies are important for economic stability and added that economic security is an important element of national security.