LAHORE: Twin deficits, concerns over balance of payments, weak export capacity, low savings and investments, and a fragile macro economy have been the key highlights from this year’s economic survey, stated the Institute for Policy Reforms (IPR).
Finance Minister Ishaq Dar unveiled the Economic Survey 2016-17 on Thursday, boasting that Pakistan had posted its highest GDP growth of 5.3% in a decade, and the size of the economy would become larger than that of Canada, Italy and South Korea’s by 2050.
But many critics believe that beneath this narrative lay a story of lack of reforms, overreliance on borrowing, and a persistent lack of competitiveness.
“It is no surprise that the economy missed most targets,” stated the IPR in its report published on Thursday. “What is surprising is that this happens each year and no one draws a lesson.”
The think tank, headed by former finance minister Dr Hafiz Pasha, said that there would be no cause for celebration even if the economy had achieved its growth target. “It is more important to change the fundamentals underlying growth and the macroeconomic frame work.”
It did not agree with the government’s claim of a turnaround based on a “comprehensive programme of economic revival”.
The report also stressed that continued fiscal and current account deficits are the real sources of concern.
“The economy stands on weak pillars,” said the IPR.
The report said that agriculture’s modest 3.46% growth this year is due to the low base year effect when crop production declined in 2015-16.
Additionally, in nine months, fiscal deficit has already breached its target of 3.8% for the year. The IPR forecasts that it will be about 4.5% of GDP by year end.
On the expenditure side, foreign debt servicing has reached Rs85 billion in 2016-17 and will almost certainly exceed this year’s target of Rs113 billion.
“Clearly, recent high markup loans have begun to have an effect. This problem will only grow with increased debt from China.”
This has implications also for the current account deficit. Export performance and weak workers’ remittance are a special concern. Exports are expected to be $21.5 billion compared to the target of $24.75 billion.
They have fallen sharply from $25.1 billion in 2014-15. “Government’s belated incentives for exporters have not had an effect.”
The IPR advised that Pakistan will have to change its industrial structure and be part of the global supply chain, if exports are to grow.
Workers’ remittances are also 2% below last year, instead of the targeted growth of 5%.
The IPR also warned that savings and investment are well below target and must increase for the economy to grow. Investment to GDP ratio is 15.8% this year against a target of 17.7%. Savings rate was 14.3% against the target of 16.2%.
Pakistan will attract very large investments from China in coming years. This is the opportunity for a period of long-term economic growth. While investments will create one time stimulus, the country needs fundamental reforms for long-term sustained growth.