Spearhead Analysis – 26.05.2017
By Farrukh Karamat
Senior Research Coordinator, Spearhead Research
The Economic Survey 2016-17 revealed a story of misses as the government continues to grapple with issues of inflows and outflows to perform a delicate balancing act. Almost all key economic targets were missed, though there was improvement in some areas:
- The GDP growth was 5.3% against a target of 5.7% and the economy touched a level of US$304 Billion.
- Fiscal deficit at 4.2% was above the 3.8% target.
- Current account deficit was at US$7.25 Billion till April 2017 and is expected to rise to US$8.3 Billion by year end, well above the target.
- External borrowings, have touched a level of US$11 Billion, and are up US$3 Billion over estimates.
- Exports are estimated to be US$21.5 Billion, well below a target of US$24.75 Billion.
- Workers’ remittances are estimated to be US$19.5 Billion against a target of US$20.2 Billion.
- FDI is expected to be around US$1.9 Billion against a target of US$4.55 Billion
- The Investment-to-GDP ratio at 15.8% is below the target of 17.7%.
- Savings at 13.1% of GDP are below the target of 16.2%.
- Fixed investment remained at 14.2% of GDP against a target of 16.1%.
- Public investment increased to 4.3% of GDP, against a target of 3.9%.
- Private investment was 9.9% of GDP, against a target of 12.2%.
- The agricultural sector grew at a rate of 3.46%, in line with the annual target.
- In the manufacturing sector against a target of 7.7%, output stood at 5.0%, with all sectors lagging the targets.
- The services sector grew by almost 6% against a target of 5.7%.
The contribution of the Industrial and Agriculture sectors declined to 20.88% and 19.53%, respectively, while the services sector contribution increased to almost 60% of the economy. This is indicative of a shift from the core areas of manufacturing and agriculture to retail and services, which are thriving on the back of an undocumented parallel economy. There will be serious repercussions in terms of employment as the services sector does not have the employment capacity that industry and agriculture can offer. With a growing, young, population Pakistan needs a sustained annual growth rate of 7% to be able to cater to the rapidly rising population.
The structural issues plaguing the economy continue to be sidelined, while the savings and investments lag targets. Budget deficit, expected to be at 4.2%, has exceeded the target of 3.8% of GDP. Tax and non-tax revenues are also expected to be below targets, albeit with some improvement over prior year. At this point the main concern is the external sector where the government is facing serious issues in managing the foreign debt and imports-related payments. With declining exports, low levels of Foreign Direct Investment (FDI), and stagnant-to-declining inward remittances; and, rising outward payments the government is facing a difficult tight-rope act. Exports continue to decline as Pakistan has failed to improve its Competiveness Index, and the export target has again been revised downwards to US$21.7 Billion, despite massive subsidy packages having been offered to the sector.
There is widespread consensus that the Rupee is over-valued by 15%-20%, but the government has been managing the conversion rates and in the process curtailing inflationary pressures, especially in the context of the sizeable import bill. The official foreign currency reserves have come down and are at a level of US$16.1 Billion, amidst concerns over the double booking of US$3.9 Billion reserves that State Bank of Pakistan borrowed from commercial banks. In addition, the government continues to borrow to bolster the reserves, which have in recent months have come under pressure.
The Troubled Export Sector:
While the government has been doling out incentive packages, the export sector continues to lag. Close to half a billion dollars are estimated to have been lost due to tax exemptions for the export-oriented sectors during the first nine months of the current fiscal year.
- Exports dropped 2.29% in dollar-value during 10 months of the fiscal year, declining from US$17.31 Billion in 2015-16 to US$16.91 Billion in 2016-17.
- The government sustained Rs.50.4 Billion in losses due to reduced rates charged from five export-oriented sectors, including textile, carpets, leather, sports and surgical goods.
- Pakistan’s major export markets, including the US, China, the UK, UAE and France, saw no visible change, while the exporters have failed to penetrate new markets.
There are no visible efforts by Pakistan exporters to capitalize on the potential opportunities that could come through CPEC. The emphasis remains on real estate development along Gwadar and the adjoining areas, and there has been speculation that exporters are diverting their funds to real estate development. Pakistan needs foreign currency inflows to meet its growing import and repayment requirements, and the government needs to jump-start the manufacturing sector. The diversion of funds to non-revenue generating vote-grabbing initiatives is not likely to provide the required results. The shift towards the service sector is likely to result in problems in the future as this sector is not providing the employment or inflows required to sustain the economy in the longer term. Structural changes are required for sustainable economic growth, and at the moment such initiatives appear to be far and in between. For now, all eyes remain on the impending pre-election year Budget, while the needed structural reforms are not being implemented and the government is not making the policy changes required to improve the long term growth prospects.