Economy under Abbasi

After assuming responsibilities of office of the prime minister, Shahid Khaqan Abbasi wasted no time in letting it be known that he is a decision-taker. On his fourth day in the office, he notified the establishment of the Ministry of Energy by merging the petroleum and power ministries. This is one reform which is mentioned in the PML-N manifesto 2013, but for four years ex-PM Nawaz failed to do what his successor did with a stroke of his pen.

In the field of energy security, Pakistan has finally achieved an electricity surplus in November after facing a crippling power crisis for well over a decade. Two LNG import terminals have been inaugurated and efforts are underway to convert furnace oil power plants to cheaper fuel — gas. Upfront tariff regime has been put to an end and renewable energy projects shall now be awarded on the basis of competitive bidding.

The State Bank of Pakistan’s three-month data for Financial Year-2018 (FY-18) shows that remittances for July-Oct FY-18 are up 2.3% as compared to the same period in FY-17. The increase is not any significant, but under the circumstances, any indicator moving in a positive direction is plausible enough. The inflation rate is at an almost optimum level of 4%. Net overall FDI during July-Oct FY-18 has jumped up to $937 million as against $501 million in July-Oct FY-17 (an increase of 87%). China remained the largest contributor, investing in its CPEC projects.

The Large-Scale Manufacturing Industry during July-Oct FY-18 has grown 9.64% as compared to the same period in FY-17. Discount rate is still maintained at 5.75%. Credit to the private sector is improving although for the most part, banks still exhibit risk-averse behaviour by lending mainly to the government. The central government’s debt is piling but the silver lining is that the external component of debt is only around 30% of the total debt and liabilities. And this provides some insulation against minor fluctuations in currency rates. But the recent depreciation of rupee is anything but a minor one.

The economy’s trade deficit situation is growing, which is quite worrisome. Exports in FY-17 were 1.42% less than that of FY-16. Data for FY-18 shows a slight uptick, July-Oct exports are at $4,429 million as against $4,062 during the same period in FY-17. The problem is that the imports have risen at a greater pace than exports, and this is what is causing the growing current account deficit. With terrorism and energy crisis assuaged, the lacklustre competitiveness of our exports is now the major obstacle to achieving an even higher GDP growth rate.

A depreciated rupee is not expected to help much. The country’s largest import category is fuel, which is an essential commodity. So a rise in its price will not lead to a fall in its total import value. After all, Pakistan is an imports-dependent economy. Moreover, a significant portion of our imports feed in to our exports. So a depreciation of rupee leads to increase in the cost of production.

Anyway, a fall in prices of our exports abroad alone would not be enough to boost their volume. A number of other factors such as time to prepare and file taxes, conformance to sanitary and phyto-sanitary measures, and other such indicators will have to be improved in order to boost the competitiveness of our exports in international markets. For now, the rise in export value due to depreciation will not be sufficient to offset the increase in value of debt.

Some other issues which require urgent attention of the premier include the growing losses of State-Owned Enterprises (SOEs) and the growing amount of circular debt, which now exceeds Rs800 billion. Contrary to what is stated in the PML-N manifesto 2013, not even a single loss-making SOE has been privatised since 2013. In the area of taxation, although revenue collection has improved, the number of tax filers (both individual and corporate) has plunged down in the current tax year.

Moody’s report on Pakistan, released on December 6^th, states, “on the upside, there is potential for further strengthening in growth beyond our current expectations, as successful implementation of the CPEC project may transform the Pakistani economy by removing infrastructure bottlenecks and stimulating both foreign and domestic investment.” On the other hand, “continued material widening of the fiscal deficit, ongoing weakening of the external payments position, loss of multilateral/bilateral financial support, or significant escalation in political tensions would also weigh on Pakistan’s credit profile.”

For now, the Asian Development Bank projects a GDP growth of 5.5% for Pakistan in 2018. This would be a marginal improvement from the current 5.3% but nonetheless another high for Pakistan. For a first-time prime minister, Abbasi’s performance so far is quite commendable. In this regard, he also benefits from the contrast effect. Of course, there are still a number of issues which need to be addressed but credit must be given where it is due, to buck up the better performers.

Published in The Express Tribune, January 1^st, 2018.

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