A review of the latest economic survey
The recent budget was launched last week as usual with much fanfare. Finance minister made huge claims about Pakistan’s economy being on the right track and the ruling party trumpets were dancing on the tune of the claim that Pakistan’s economy has achieved highest growth rate since the economy collapsed in 2008. Yes, this is true that Pakistan’s economy is back on the right track but as the former IMF chief for Pakistan, Jeffrey Franks put it rightly “Pakistan has crossed the first 5 km mark in the marathon but the only way to finish the race is to finish the first five kilometers, then the next 5 and then so on.” So, it is a marathon and instead of trumpeting on our victory, we should try to focus on how we can cover the next 5 km in a speedy way without falling down. For that we need to have a closer look at the economy and ponder about how to improve the underperforming sectors.
First of all we need to understand the sources of growth. Much of the Pakistan’s growth this year came from the services sector contributing 60 % in the GDP and among the services sector, retail and whole sale trade was the biggest sector contributing 18.5 % to the GDP which is almost equal to the contribution of the entire industrial sector to the economy including the Large Scale manufacturing (21 % of GDP). This reflects the continued rise of the urban middle class and its high propensity to consume. Services sector registered a 6 % growth rate for this year, industrial sector registered a 5 % growth rate while agricultural sector also rebounded to a 3.5 % growth this year contributing to an impressive 5.3 % growth rate, albeit less than the projected 5.8 %.
For a country to grow more rapidly, it needs foreign capital inflows, primarily to maintain a stable currency, pay for its imports and foreign commitments, and maintain balance of payments. The three primary methods to enhance foreign reserves are increasing exports, increasing foreign remittances and increasing FDI. Unfortunately, in our case, both exports and foreign remittances have been decreasing while on the other side imports were increasing thus increasing the current account deficit. It is alarming that not only textiles but our exports have been decreasing in all of the major segments. According to the economic survey of Pakistan, the rice group had a 15.8 % negative growth. The reasons stated are lack of R & D in new varieties and a strong competition with India. Sugar had an alarming 57.9 % percent negative growth. The fruits and vegetable sector had a negative growth of 25.5 % and 24 % respectively. Again the reason stated is international competition and lack of exportable surplus. Meat and meat preparation, which were termed as the next export potential for Pakistan, had a negative growth of 30.1 %. The reason stated was lack of exportable surplus. In the textile sector, the cotton cloth and the towels had a negative growth of 15 % and 2.2 % respectively. However, the readymade garments registered a 4.7 % positive growth which again reflects the importance of making a transition in textiles towards high end value added segments. One problem is also the mind set of our traditional entrepreneurs. The government in collaboration with local chambers of commerce should train the traditional entrepreneurs for a transition to high end value added textile exports. The tanned leather, leather goods and sports goods including football exports also decreased and the reasons stated in the words of the economic survey are “our exports could not compete against our competitors like China, India, Bangladesh and Vietnam etc. whose products are available at relatively cheaper prices. As a result our share in the world export market is on a declining side”. Overall, the exports witnessed a downfall of 3 % this year while textile exports witnessed a decline of 0.9 %. The bitter fact is that our exports are in trouble. Both labour and energy input prices are expensive in Pakistan and given this situation we cannot compete with regional countries and worldwide unless the industrial sector is not given special incentives in energy inputs along with imported materials needed for producing finished goods. In case of natural products like rice, meat and fruits, we never focused on R & D to improve their yield and the result is that now we are facing a lack of exportable surplus and increasing prices resulting in our inability for competing in the international market. That is why there is a severe need to alter our whole export model with a focus on transitioning to a value added knowledge based economy where our main exports would be high end technological products, services and value added items in the traditional sectors. If we will focus on high end technological and industrial products, it will carve out a profitable niche for Pakistan both in terms of exports and FDI. In this way, we can become collaborators with regional countries instead of competitors with an increase in the regional trade and investment. Given the present situation, it can be predicted that either the Pakistan’s exports will remain stagnant at the same level or will grow a very slow pace. To finance the current account deficit, the government had to take a loan by issuing the Sukuk Bonds worth USD $ 1.0 Billion and along with that, increased FDI inflows helped to cover the gap.
Another important variable which can affect the growth is the debt to GDP ratio. Pakistan’s debt to GDP ratio is at an alarming high rate of 59.3 percent. Since 2013, external debt has increased 22 % while the domestic debt has increased 36 %. Overall, the debt has increased since 29 % since 2013. The finance minister announced very proudly in the budget speech that now we do not need any loans for financing our current expenditures and all the loans taken now would be spent on productive purposes. However, economic survey states that almost half, around 45 % of our annual revenue is spent on debt servicing i.e. paying the interest on loaned amounts. Without a stable source of foreign exchange, government cannot survive without taking the loans.
The third variable for foreign exchange is foreign remittances. They witnessed a decrease of 2.5 % in the current fiscal year from July – April .The reasons are low performing Middle Eastern economies, drop in oil prices and Brexit etc. The poor performance in foreign exchange inflows does not means that everything is bleak. Pakistan has made impressive improvements in reducing its fiscal deficit, inflation and has made significant development in other key areas. Fiscal deficit has been reduced to around 4 %, the government is now spending more on development expenditures rather than current expenditures, and tax to GDP ratio has risen to 12. 6 %.
Given the present scenario Pakistan is in a dire need to stabilize its foreign exchange reserves and increase them by increasing and diversifying its export base. Pakistan may not encounter any balance of payments crisis like 2008 due to huge FDI inflows from China but it will not be able to speed up its growth as well. Pakistan’s current growth is based on a strong domestic demand as is evident by the strong contribution of services sector in its growth but to fuel it up we will need to enhance our exports. Along with focusing on our traditional star export products we should start paving the way for high end technological products e.g. transistors, chips used in computers and mobiles, or other high end industrial products and provide incentives to overseas Pakistanis to invest in these sectors. The government should provide incentives to promote an entrepreneurial culture among the educated youth of Pakistan as they can be the driving force for introducing industrial and technological innovation in Pakistan. And the incentives should not only include IT sector but also the agriculture and industry. In this budget the government approved another scheme to provide Rs. 50,000 for people getting BISP allowances to start their own micro businesses which is a commendable step. Similarly the government has given tax incentive for startups which is indeed laudable. With the right set of monetary policy, a prudent fiscal policy, more investment on health and education, and least to mention, a strong focus on exports we can continue our marathon towards economic growth and development.
