Our economy — the good, the bad, and the ugly

It’s that time again

Winter is coming to Westeros. If you’re a Game of Thrones fan, you know what that means. In a less fictitious yet equally chilling reality, the budget is coming to Pakistan. If you’re a Pakistani, you know what that means.

It means IMF bailout commitments, it means defence spending, it means tax to GDP ratios and just a slew of things that determine our economy’s lifespan – and by association ours. And from the look of things, it seems to be a very mixed bowl at the moment.

Bad news first. Pakistan’s had a tough year dealing with operation Zarb-e-Azb and the IDPs costing the country millions in expenditure. Couple that with the international decline in oil prices resulting in a revenue collection of Rs1968.8 billion, up only 12.8 percent from last year’s Rs1744.9 billion, the government was unable to meet its collection target of an ambitious, yet achievable, 15 percent. To add insult to this injury, however minor, the agreed upon terms with IMF in 2013 promised a GDP growth target of 5.1 percent; this had to be negotiated down to 4.1 percent for 2015.

But all is not doom and gloom. A few economic indicators are comforting for those weak of heart.

While it may seem like bad news to have missed the GDP growth target for this year, the target is expected to accelerate to 4.5 percent next year

According to the latest IMF report: Pakistan’s economy continues to gradually improve, helped by macroeconomic stability, lower oil prices, robust remittances, and higher supply of gas and electricity.

As per a recent conference held by Ishaq Dar, the man of the hour, the giver and taker of life as far as our economy goes, we have met the target on Quantitative Performance Criteria (QPC): net international assets, net domestic assets and borrowing from central bank. No waiver was asked for in the sixth review and none in this one. The inflation rate that was 8.8 percent when PML-N took charge dwindled down to 3.6 percent in February and is finally expected to climb up from its 2.1 average in April, reflecting the stabilisation in international petroleum prices.

While it may seem like bad news to have missed the GDP growth target for this year, the target is expected to accelerate to 4.5 percent next year. A big fiscal deficit of 8.0 percent in 2012/2013 has been promised to be reduced to 4.9 percent by June and an agreed-upon fiscal deficit target of 4.3 percent casino is all set for next year.

Then there is the matter of human rights. In January 2014, the European Union granted Pakistan GSP Plus status, which is currently granted to 13 developing countries. The GSP Plus scheme has allowed Pakistan tariff free exports to European markets. The economic benefits of GSP Plus are significant with textile, garments and leather goods exporting sectors to be the biggest beneficiaries. The issue is that with Pakistan’s somewhat unenviable human rights record — bonded labour, ill-treatment of women and minorities, etc — there is a chance that it could lose its GSP Plus privileges. This, if it happens, will be a mighty blow to our economy. One need only look at Sri Lanka to understand this well. Sri Lanka, in 2010 paid a dear price for its human rights violations in the Civil War and for not adhering to the 27 point mandatory covenant, which resulted in the country being stripped off its GSP plus status. Five years and numerous negotiations later, Sri Lanka is finally in the process of being given the privilege once more. Pakistan’s economy cannot afford the same luxury.

Aside from our damning human rights violations and possible revocation of GSP Plus status, there are other areas of concern. Take inflation. As of now a low inflation rate could bring in a host of other problems, bearings of which we are already experiencing. Our exports, according to recent reports, have been on the decline. This can partly be attributed to the global reduction in commodity prices (cotton, wheat, rice, etc) since textiles make 60 percent of our exports. But the primary factor as presented to the National Assembly by the ministry of commerce is our overvalued rupee to dollar rate that Mr Dar stubbornly refuses to revise despite the urging and nudging from economists. While experts opine that the rate should be around Rs112 as opposed to the current Rs102, the government’s refusal is entrenched in its insistence to control inflation. Commerce Secretary Mehmood Shehzad Arbab revealed to the National Assembly in a recent briefing that the government had not only failed to meet its target export of $27 billion for this fiscal year but also fell below last year’s export of $25 billion.

Aside from our damning human rights violations and possible revocation of GSP Plus status, there are other areas of concern

Our tax to GDP ratio has increased over the last two years from less than nine percent in FY 2013 to roughly 10.5 percent but the need is for the tax collection process to be overhauled. For that the tax collection machinery needs to perform better than it has thus far – a fact known to all things alive in Pakistan. A medium term plan includes bringing our biggest tax evading sectors, real estate and retail, into the tax net by removing tax exemptions from certain sectors including these.

In an environment of low international oil prices, these achievements present a unique opportunity to continue strengthening public finances and overcoming obstacles for higher investment, jobs and growth. Imperative measures include improving the energy sector; widening the tax net to create opportunity for infrastructure investment and social assistance; refining the business climate; and further strengthening external reserve buffers.

UN Economic and Social Commission for Asia and the Pacific (ESCAP) 2015 survey shows that Pakistan seems to be on the right track and given the government’s measures in addressing energy and electricity shortages, especially in terms of building an economic corridor with China, the economic growth of Pakistan is expected to improve in the coming years. Hallelujah.