- IPR’s Dr Hafeez Pasha says economy would fall well short of its target growth rate of 5.1 per cent
Despite government’s ambitious plans, Pakistan’s economy remained mired in difficulties during the first half of the current fiscal year, said Institute for Policy Reforms (IPR) Managing Director Dr Hafiz Pasha at an event held Thursday.
IPR also released a report that reviews the country’s economic performance for the period July-December, 2014.
Referring to the IPR report, IPR Chairman Humayun Akhtar Khan stated that most economic indicators reflected below-par performance. A major concern was continued slow growth in Large Scale Manufacturing. He noted that industrial growth this fiscal year would be even below the dismal 4 per cent growth of last year.
“One reason was the continued poor state of the power sector. Generation almost remains stagnant, and DISCO losses are high. I hope that government would come up with a bold and clear policy to develop the power sector. So far, it seems to be a case of one-step forward two steps back,” he said, adding that a number of other economic indicators were also a source of concern.
“Investment, public and private, is weak, tax collection will fall well below target, and exports have declined in the face of an overvalued exchange rate. To maintain foreign reserves, government has taken on substantial high cost debt,” he said, adding that economic growth was key to restoring stability in the country.
In his presentation, Dr Hafeez Pasha gave an in-depth review of the economy. He referred to targets for economic indicators set by government and expressed apprehension that the economy would miss most of these. IMF too had a set of projections for public finances, mostly below government estimates. IPR is of the view that these too were optimistic.
Dr Pasha said that the economy would fall well short of its target growth rate of 5.1 per cent. All determinants of growth such as agriculture and industrial production were sluggish and below the growth rate of the last fiscal year. Industry grew by 2.5 per cent in July-November 2014 compared to 6 per cent for the same period in 2013. The target for industrial growth was 7 per cent. Large Scale Manufacturing grew only by 1.5 per cent.
Likewise, growth of major crops was 2.5 per cent in July December 2014 compared to 3.7 per cent in 2013. Growth rates of minor crops and livestock increased though.
Power load shedding continued unabated in the country. Generation of power grew by a small 5 per cent above the level attained two years ago. Performance of DISCOs hobbled the sector and so far, it was unclear how the benefits from low fuel price would help strengthen the power supply.
Moreover, the report states that it is unlikely too that the economy would meet the investment target of 16% of GDP. Its three elements showed a mixed trend. Machinery import increased by 6 per cent and important segments, such as, textiles and agriculture saw double digit decline. Tardy PSDP releases meant low public investment. For the half year ending December 2014, amount released was 28 per cent of total. It was especially surprising that power sector saw the lowest rate of release. Private credit declined by almost 38 per cent during the period while public borrowing increased by almost 750 billion rupees.
Moving to balance of payments, he said that trade deficit widened by 36 per cent. Growth in home remittances and receipt of coalition support fund, however, alleviated the situation. Foreign exchange level increased also because of successful Sukuk bond float of $ 1 billion and release of $ 1.1 billion from the IMF. Foreign direct investment saw an increase though the total amount remained small.
Pasha advised caution about external borrowing. Despite increase of $ 2.4 billion in borrowing, reserves grew by only $ 1.5 billion, which shows that already borrowings have financed BOP deficit. He considered this a risky strategy. Decline in export was a cause of concern. An overvalued exchange rate had reduced competitiveness of Pakistani exporters.
One fortuitous development was decline in inflation, down from 9 per cent for the July-December, 2013 period to 6 per cent for the same period in 2014.
Dr Pasha considered some IMF projections for the economy optimistic. IPR estimates that actual tax and non-tax revenue may be about Rs 150 billion below IMF forecast and expenditure significantly higher.
Growth rate of the economy is estimated at between 3.8 to 4.3 per cent while IMF projected 4.3 per cent. IMF estimated fiscal deficit to be 4.8 per cent while in IPR’s view this will be 6.1 per cent by year-end. IPR and IMF estimate current account deficit to be 1.4 per cent against government’s target of 1.1 per cent.
