Glass Half Full

Spearhead Analysis – 16.12.2013

Pakistan Economic GrowthRecently the Finance Minister of Pakistan made two startling statements. In the first one he said that he would bring down the US Dollar-Rupee exchange rate to 98 — he did not explain how and nor did he give a time frame. Currently the rupee trades against the dollar at around 107. In his second statement he advised hoarders to sell their dollars — he did not elaborate so it could have been a warning or a precursor to some drastic action. No one has forgotten the sudden freezing of permitted foreign exchange accounts in 1998 after the nuclear tests led to sanctions.

To be fair to the Finance Minister it is important to note some recent events. The European Union has granted duty free access to Pakistan’s exports under the EU’s GSP Plus scheme. This will most certainly give a boost to the textile and clothing industry and spur foreign investment in the textile sector. The Sind government has set up a Garment City in Karachi and Punjab is planning its own garment city over an area of 1300 acres in the Sheikhupura area and accessible from the Islamabad-Lahore Motorway. Chinese investors are said to be taking interest.

There is the recent 22% growth in the market capitalization of the Karachi Stock Exchange. The government plans to boost capital market transactions and plans are also afoot to launch a $500 million Eurobond as well as a remittance based bond for overseas Pakistanis for between $500 million and $1 billion with returns denominated in rupees. The sale of 3G spectrum auction is so far scheduled for February 2014 and could generate as much as $1.2 billion. The ‘franchise industry’ is also booming especially in the food and entertainment sector.

According to the Finance Minister the government has added or revived idle 1700 MW of capacity to the national grid and has cleared a circular debt of Rupees 480 billion though there are media reports that this debt has resurfaced because the basic underlying causes needed to be addressed. In the last quarter the industrial sector registered about 5.2% growth while the agricultural sector grew by 2.5% and the services sector by 5.7%. This translates into real GDP growth of around 5%. All these figures are an in improvement over the previous year. The Finance Minister also claims revenue growth of 17% over last year and aims for 27% in the future. He also plans to get overdue Coalition Support Fund payments from the US and expects increased foreign exchange inflows as the economy slowly revives.

These achievements cannot be disputed and are vastly encouraging. A little realism is, however, called for because there are some things over which the Finance Minister has no control and that cumulatively make the economic environment fragile and therefore subject to disruption. There is the susceptibility of the agricultural sector to weather, natural disasters, virus attack or a water shortage. Then there is the specter of inevitable gas and power shortages that are already disrupting industry. Above all there is the security environment — kidnappings for ransom, extortion, crime, terrorist attacks, sectarian and ethnic attacks. The continued deterioration in the public sector ventures and a lack of timely decision making adds to the uncertainty and degradation of the environment. So while the Finance Minister is entitled to his glass half full optimism there is a need for others to support him.

An institutionalized decision making and policy formulation tier backed by credible experts could go a long way in orchestrating all institutions in support of the overall economic reform process. Investors may be impressed by statistics but risk assessment always kicks in to temper investment decisions. Instead of short impact amnesty schemes if the focus was to shift to an upgradation of the internal environment money would flow in because in today’s discriminatory world there is no better place for Pakistanis than Pakistan.

(Spearhead Analyses are collaborative efforts and not attributable to a single individual)