Spearhead Analysis – 20.09.2013
By Enum Naseer
Research Analyst, Spearhead Research
Pakistan’s economy is nose-diving against all efforts to revive and revitalize with the situation becoming particularly troublesome in the past few days. The government’s repeated assurances of a better tomorrow are falling short given the position from which the economy is expected to rebound. The dream of following the Asian tiger trajectory seems distant and delusional for a country where the growth rate has averaged 3 pc in the last 5 years (a figure too low to match its population growth rate) and the tax-to-gdp ratio has clocked in at less than 9% of GDP. Whereas the government aims for growth between 6%-7%, it is likely that it will not achieve more than 3%.
It must be reiterated that the ruling party was fully cognizant of these problems when it assumed power: it came armed with a roadmap and strategies to breathe a new life into the lackluster economy. The federal budget was presented and passed amidst strong criticism from the masses as taxes increased and structural problems went uncorrected. An IMF deal followed soon enough enabling the country to secure an Extended Fund Facility worth $6.5bn for a period of three years.
However, as the government scrambles to fight on multiple fronts, it is finding its pre-election homework inadequate. With the dollar soaring at levels over PKR108 in the open market (the highest value to date) and fears of a continued free-fall of the national currency, the economic situation isn’t looking up. It is argued that there are multiple reasons for the rupee’s devaluation: a commitment with IMF to maintain a high value for the dollar, huge loan repayments to the donor agency, interbank borrowing, and speculation (leading to more investment in the dollar as opposed to gold). The finance ministry, however, insists that the rupee will stabilize in near term as the government is aiming to improve foreign exchange reserves by $625 million through commercial bank borrowing which will serve as a quick fix. An additional measure to rectify the situation- a more persisting one perhaps, could be to focus on boosting exports and controlling imports.
The stock market’s performance has also heightened concerns: it plummeted by 551 points on Tuesday closing at 23,088.49 points (against 23,639.97 points recorded in the last session) owing to institutional and foreign selling. In the recent past, the KSE’s performance has been anomalous: clearly negating the country’s dismal macroeconomic indicators by becoming one of the best performing bourses in Asia. This is attributed to the free hand given to investors by the Tax Amnesty Scheme (enforced by the previous government). So far this law has provided a hedge to the stock market against the turbulence in the economy but the more relevant question is whether or not the effect will wear off before the end of the fiscal year as other determinants such as the security conditions gain importance and rearrange the overall landscape. Analyst, Zafar Moti does not see brighter times ahead. According to him, the only positive trend that the KSE-100 can benefit from is that of good corporate results: the increased rupee-dollar parity and the increased policy rate announced by the SBP have taken a toll on the investor sentiment (leading to a massive outflow of $10 million on Tuesday) and if the trends are to continue unchecked, the market is not likely to recover.
Hence, it suffices to say that the economic predicament cannot be viewed in isolation: reforms aimed at alleviating troubles in that area will achieve little if they do not come as part of a larger plan to rid Pakistan of its woes. Integration between the strategies employed at all fronts will be key; for economic improvement, nipping the evil in the bud includes correction of structural weaknesses and creating an environment conducive to investment. The violence in Karachi and the Peshawar blasts have triggered a fresh wave of insecurity and pessimism at a time when the economy is hungry for investor confidence and stability in general. The situation thus, warrants a more thorough triage assessment and bolder decision-making by those running state affairs to evade a potential doom’s day scenario.