Spearhead Analysis – 13.01.2017
By Farrukh Karamat
Senior Research Coordinator, Spearhead Research
The World Bank in a recent report, “Global Economic Prospects; Weak Investment in Uncertain Times”, has revised Pakistan’s growth rate to 5.2 per cent for FY2017, and 5.5 per cent for FY2018. Previously growth forecast for Gross Domestic Product (GDP) of Pakistan was at 5 per cent for FY2017 and 5.4 per cent for FY2018. The report states that the improvement is based on a combination of low commodity prices, rising infrastructure spending, and reforms that lifted domestic demand and improved the business climate. It is forecast that growth will increase from 5.5 per cent in FY2018 to 5.8 per cent in FY 2019-20, with improvements in agriculture, infrastructure, energy, and external demand.
It is further stated that the successful conclusion of Special Drawing Rights (SDR) of US$4.393 Billion International Monetary Fund’s Extended Fund Facility (EFF) programme, was aimed at supporting reforms and reducing fiscal and external sector vulnerabilities, and it helped lift consumer and investor confidence. The China-Pakistan Economic Corridor (CPEC) initiative is expected to further increase investment in the medium-term, and help resolve some of the issues within the transportation and power sectors.
In line with these revised estimates Pakistan has been placed as one of the world’s fastest-growing Muslim economies in 2017 ahead of countries such as Indonesia, Malaysia, Turkey and Egypt, as per “The Economist” magazine. With an estimated GDP growth 5.3 per cent it is also placed as the world’s fifth fastest-growing economy, only behind India (7.5%), Vietnam (6.6%), and China (6.4%), and Philippines (6.4%). The Economist forecast is given further credence by a Harvard University study, which had predicted that Pakistan economy would grow in excess of 5 per cent in the next decade and the Bloomberg report which ranked the Pakistan Stock Exchange as the 5th best performing stock market in 2016.
These are heartening statistics for a country that is continually maligned on multiple fronts in the face of sectarian threats, political instability, and on economic indicators such as: a ballooning debt; falling exports; rising imports; falling remittances; almost negligible Foreign Direct Investment; and, FX reserves being built up through excessive borrowings. There have been serious reservations expressed over the issues of management and governance as well as transparency over the CPEC investments. Recently, some quarters have also expressed serious concerns about the mortgaging of National Assets, such as Motorways, Airports, and Broadcasting stations, to acquire additional debt. Panamagate continues to be a sore point and one that has become more of a media circus than an actual trial with far-reaching reputational implications internationally for the country. Yet, despite all these issues Pakistan appears to be on a robust path of progress and growth based on the strong endorsements by the International organizations.
It needs to be understood that Economists and Forecasters are human, and make predictions based on factors, which often prove to be unpredictable. They can be wrong, as was Ben Bernanke when he made a prediction in 2007 that the United States would not head into a recession and that the stock exchange and housing markets would be as strong as ever. In 2008 his predictions were proved abysmally wrong due to an unexpected external shock and the US economy faced one of its most serious crisis post the 1930’s Great Depression. It is therefore important to evaluate the ground economic realities in Pakistan.
The Pakistan Stock Exchange continues to touch new heights after the Chinese acquisition of the 40% stake valued at US$85 Million, and is currently hovering around the unprecedented level of 50,000. Truly, a remarkable achievement and one that has put it amongst the top performing indices in 2016. While short term speculative euphoria and manipulation can fuel growth, long-term-sustainable growth is based on actual performance of the underlying stocks. That will depend on the performance of the listed companies. There have been scenarios in the past when ‘bubbles’ were built up followed by long periods of depressed prices.
The Foreign Exchange Reserves have been built up to a level of US$23 Billion plus. This too is a remarkable achievement, though it is strongly believed that the bulk of the reserves are funded through borrowings, in the face of dwindling inflows and high outflows. The issue of the mortgage of national assets for this purpose is now being brought into focus as is the issue of rising outflows for imports, profit repatriation, and maturing loan and interest repayments. All these factors are expected to place additional pressure on the reserves in the absence of viable revenue generating opportunities.
The Retail sector is an important gauge and strong retail sales have a direct impact on a country’s GDP. In Pakistan the Automobile sector has shown robust results, particularly the motor-cycle industry, which has exhibited growth of 10 per cent per annum. Sectors allied to the wedding industry remain strong with an incessant rise in expenditures. Textile and made-up garments, home accessories, construction material, and restaurants appear to be doing well with strong internal demand. It is difficult to estimate the retail sector contribution with accuracy due to the fact that this is mostly a cash based sector with undocumented transactions.
The Real Estate market received a temporary set-back after the proposed reforms, but the Government is making efforts to revive the sector and restore confidence. The sector has gone through a rationalization phase and should come out stronger in the longer run.
New business startups are an important contributor to the economy and in Pakistan there appears to be a focus on small businesses in the absence of larger investments. The emergence of the small scale enterprises is critical for growth and organizations such as LUMS are playing an important role in identifying new opportunities through their incubator programme. This is a welcome sign as this creates employment opportunities and provides a growth impetus for the economy.
GDP growth in the economy is mainly a result of depressed commodity prices and non-revenue generating infrastructure projects in the absence of genuine industrial growth. While the CPEC initiative is expected to have a positive impact with the establishment of Industrial and Trade zones, there is an apprehension that the Chinese firms would set up industries and warehouses and Pakistan would lose out. The falling exports point to a declining manufacturing sector, however, the recent Textile Package of Rs.180 Billion should boost the sector. The internal dynamics appear to be improved as a result of the ongoing infrastructure construction projects with cement and allied industries making bumper profits and expanding facilities. GDP has been called a flawed indicator of growth, as programmes such as excessive government spending can be a contributory factor for creating a ‘false’ sense of growth.
Pakistan’s unemployment rate estimated at around 6 per cent is not particularly worrisome. However, there is a high element of ender-employment which is leading to lower productivity and lower earnings. It has been estimated by the Government of Pakistan that almost 60% of the population is below the poverty line. This is an extremely worrisome issue, when combined with the low levels of education and high population growth rates in the country. It can actually prove to be a severe drag on economic growth in the long term.
The Consumer Price Index in Pakistan (CPI General) increased by 3.7% on year-on-year basis in December 2016 as compared to an increase of 3.8% in the previous month and 3.2% in December 2015. On month-on-month basis, it decreased by 0.7% in December 2016 as compared to an increase of 0.2% in the previous month and a decrease of 0.6% in December 2015. Core inflation measured by non-food non-energy CPI increased by 5.2% on YoY basis in December 2016 as compared to an increase of 5.3% in the previous month and 4.1% in December 2015. On a MoM basis, it increased by 0.1% in December 2016 as compared to increase of 0.2% in previous month ,and an increase of 0.2% in corresponding month of last year i.e. December 2015. With a low interest rate environment and depressed commodity prices inflation has been contained, but has the potential of rising in the future with a rise in interest rates and commodity prices. The recent GoP auctions for treasuries have exhibited the expectations for an interest rate rise.
The Rupee has come under strain in recent months, trading at around the Rs.109 level against USD, while the government has held the rate at around the Rs.104 level in the inter-bank market. In the face of weak dynamics there are expectations that the Rupee would be devalued in the near future to around the Rs.115 level, which would place considerable inflationary pressure on the economy. While it would place additional pressure in terms of external debt, it could provide a competitive advantage for the floundering export sector.
The Balance of Trade in Pakistan is expected to be Rs. -243,396.72 Million by the end of this quarter, according to Trading Economics global macro models and analysts expectations. Looking forward, the estimate for Balance of Trade in Pakistan stands at Rs. -244,503.61 Million in 12 months time. In the long-term, the Pakistan Balance of Trade is projected to trend around Rs. -244,557.35 Million in 2020. The continued deficit has placed considerable fiscal pressure on the economy in terms of rising debt levels and financial burden.
The health of the economy is connected to consumer sentiment and indicators can be manipulated to provide a positive outlook. Pakistan has the potential to improve its growth rate, but for that to become a reality governance and management has to be improved and made transparent. The policies should induce confidence for investment and not become grounds for ridicule. Economic growth is vital for the prosperity of this country and having stabilized and built a base the government now needs to fill the gaps. Inflows need to be improved for genuine economic growth and outflows contained. At the same time debt needs to be contained and Pakistan needs export oriented growth, rising FDI, and higher workers’ remittances.