ISLAMABAD: The Institute for Policy Reforms (IPR), in its report on the country’s economy for the period from July to December 2015, said that the government has achieved its targets for economic stability, under an International Monetary Fund (IMF) programme, but fell on growth.
According to the report, the entire focus of policymakers, at present, seems to be on balance of payments and fiscal deficit. With a substantial provincial surplus, fiscal deficit for the period July-December 2015 was 1.7%, which is well within the target for the year.
Revenue collection and expenditure are largely on track. The latter especially because half-year public sector development spending was about one quarter of budget. The rate of inflation too has dropped. For the period July 2015 to February 2016, year-on-year CPI fell, though it is above the lowest point of September 2015. The fall in inflation stalled due to an increase in GST on some items and also due to the devaluation of rupee in August and October.
Growth during July-December 2015 has been slow. Against its annual target of 6%, large-scale manufacturing grew YoY by 3.9% during July-December 2015. In agriculture, production of cotton and rice, two major crops, fell. This year, cotton lost about a third of its previous year production. Sugarcane production may increase from last year’s low, but will be short of the 68 million tonnes target. Agriculture growth is unlikely to meet the government’s target of 3.9% for the year.
Investment also may not meet the target set by the government, as there may be cuts on development. Credit to the private sector and import of machinery have increased. It is not clear if these are sufficient to boost investment to the desired level.
Power supply, which grew modestly during July-November, continues to constrain economic activity. Overall, IPR subscribes to IMF’s cautious growth estimate of 4.5% for 2015-16 against the government’s 5.5%.
Balance of payments poses a special challenge. With decline in exports and low FDI, the economy has relied on external debt, sometimes at high cost. Consequently, the burden of debt repayment would increase significantly in the coming years. Exports fell by an alarming 15% during the six months under review. Textiles, the main export, alone fell by 9%, which is partly due to slow growth of the world economy and world trade. However, Pakistan’s exports have suffered also because of the devaluation of rupee and fundamental issues of competitiveness.
The report also emphasises that while it focuses on stability, the government must concurrently begin structural reforms of the economy. This is critical if the country is to break out of the low growth trap and continued dependence on external savings. It suggests that for far too long, policymakers in Pakistan have relied only on management of macroeconomic indicators. It is time for strong action on reforms.
Even within stabilisation, they must aim for quantum growth in tax revenues. Successive governments have been unable to persuade important constituencies to pay taxes. The government must reengineer tax policy and administration. Without this, it cannot play its due role in development.
The report counsels the government to avoid cuts on development expenditure. It refers to other issues with PSDP, as limited funds available are not wisely spent. Project selection is top down, contracts overpriced, and delivery tardy.
The government must take steps to boost business activity. Revival of industry and agriculture need a mix of policy, governance, and public investment support. Access to project finance for the private sector is key.
Other factors hinder sustained economic growth. The report refers to governance, labour productivity, and education as barriers to growth. There is yet no top-level discussion on improving these fundamentals of development.
The report finds that too much hope is placed on the China Pakistan Economic Corridor (CPEC) for economic revival. While CPEC will stimulate growth, the economy would not have sustained development without fundamental reforms. CPEC would also increase Pakistan’s external indebtedness. It is very important, therefore, to select CPEC projects judiciously and ensure their effective delivery. CPEC projects must have high economic returns so that the country can pay off the debt incurred. External debt is a deep-rooted issue for Pakistan and it will grow with new projects and concomitant import of inputs such as LNG and coal.
