Spearhead Analysis – 10.11.2015
By Hassaan Khan
Research Analyst, Spearhead Research
Having argued the case for emerging markets in the context of the global economic slowdown this piece will try and make the case for why there is reason to be optimistic about the Pakistani economy. Already the economic indicators, as so often we are reminded by the premier, are positive. Even though the voices emanating from the government should be taken with a pinch of salt for they are often exaggerated to legitimize their own governance, they are not entirely without merit or purely grounded in rhetoric. Indeed, inflation is under control; our foreign reserves stand at around the $20 billion USD mark ($15 billion USD with the SBP); the stock exchange has posted considerable returns in recent years; GDP growth is a healthy 4.2% and of course, there is the prospect of the China-Pakistan Economic Corridor bolstering growth through investments in infrastructure.
Interest in the Pakistani economy is increasing and it is not just China (with whom we have always enjoyed a healthy rapport) that is interested—other countries and foreign investors are eyeing Pakistan as well. Just recently—over the past couple of weeks, we have seen tangible evidence of this increased interest in the Pakistani economy. In a statement released by the Minister of State for IT, Anusha Rahman announced that a Korean bank has started feasibility study for the state-of-the-art IT park capital and by next year the contract signing and ground breaking ceremony of the project will take place. Sheikh Nahayan Mabarak Al Nahayan from the UAE has invested $5.4 million in Pakistan’s fastest-growing mobile payments company Inov8 Limited which has achieved a valuation in excess of $100 million USD. General Electric Chairman and CEO Jeffrey Immelt announced three significant investments in Pakistan, valued at over $50 million, including the setting up of a dedicated technology and digital centre in addition to investments in local manufacturing and clean energy projects.
These developments represent a beginning of things to come and are indicative of the potential of the economy. Realizing that potential is another story in its entirety and to that end policymakers and key players need to act decisively if we are to grasp this window of opportunity. The security situation needs more attention—the situation in Karachi has improved but needs to be sustained through the long run. The energy crisis, and soon to be realized water crisis need immediate attention with actors acting for the good of the country and not their partisan interests. The stock market needs to become more transparent in its mechanisms to attract investors and as the KSE 100 reaches its resistance level at around the 35000 mark unscrupulous trading needs to be kept in check so as to avoid a potential crash.
Pakistan’s exports have shrunk by $538 million USD, or 9%, on an annual basis during the first quarter of the current fiscal year as the strength of the rupee at the beginning of the year put off many of our importers. The year-on-year rise in foreign direct investment for Jul-Sept was $15.6 million USD, or 7.7%, which should be higher in view of the GSP-Plus (Generalized System of Preferences) status that Pakistani exports enjoy in the European market. Our bourgeoning levels of foreign reserves have been a source of pride for our finance ministry but a huge chunk of these reserves owe their existence to foreign debt. So as inflows of capital from the IMF dry up next year and Pakistan starts making payments to Paris Club and to the IMF itself in 2017-18 prudent use of these reserves is necessary. Then there is the matter of our state run organizations including but not limited to the railways and PIA which are brimming with inefficiencies stemming from nepotism and continue to be a burden on the state treasury.
There should be no doubt that the economy faces obvious hurdles some of which have been touched upon in this piece but these problems are not unexpected as well. We, as a nation, are prone to extremity of opinion and believe in labeling situations in black or white. There is no middle ground for us, either we subscribe to the government’s claims of Lahore rivaling Europe in the future or the opposition’s prophecies of Pakistan entering the dark ages unless they are elected. Both scenarios are highly unlikely and unrealistic—what is realistic is that through steadfast reform we can achieve a GDP growth rate of around 4.5% for the next five years at least and maybe more (both in terms of the rate and duration of growth). What is required more than anything for a lack of a better word is maturity from our institutions and willingness on the part of policy makers to look at the long term rather than looking for a short term fix. There is cause for optimism and sure there might be testing times ahead but if our institutions are able to ride this volatility and emerge as more efficient they can usher in a an age of progress ahead.