Economic outlook

After reaching a peak in 2007 when Pakistan earned the distinction of being one of fastest growing emerging economies the last seven years recorded a downward trend for country’s economy, reaching its lowest in 2012-13. While Vietnam, India and China, to this day, have managed to defend their positions, Pakistan dropped out of the race and its status as an emerging economy lost out. The year 2015 started with a better outlook for Pakistan’s economy and its global recognition, thereby prompting fund donors to once again look at Pakistan with interest.

The Bloomberg Business, a top ranking global business media, in its review based on experts opinions, has rated Pakistan’s economy as a “Frontier Market” – a market in a developing country growing more rapidly than other similar economies but not attractive and big enough to be rated as the emerging market. The primary drivers recorded for this positive rating are the recent high end construction boom where the industry grew by 11.3% over last financial year, privatisation of public assets and sale of government stakes in state companies, state investments in boosting infrastructure to the tune of Rs 1.5 trillion, recording an increase of 27% over last year, the cheapest borrowing costs in 42 years, tamed inflation buoying consumer spending and benchmark KSE 100 stock index which has grown about 16% in the last 12 months – being among the world’s top 10 performers largely driven by the boom in steel industry and cement industry.

The IMF, which has pledged $6.6 billion, has positioned itself well in the driving seat to enforce structural reforms in Pakistan. Its primary targets are delivery of structural reforms as per set milestones, enforcement of the privatisation process, fiscal discipline and governance.

The IMF appears satisfied that the targets are being well met by Pakistan and is optimistic that significant economic revival is well within Pakistan’s reach. All this prompted Moody’s to upgrade Pakistan’s sovereign credit ratings by a notch for the first time since 2008. With global country perception significantly improved, foreign reserves standing at $18.2 billion, a $42 billion pledge in hand from China to fund projects in Pakistan and with positive public outlook, the country possess the basic ingredients to make a big stride. The challenge is how to put the act together and make things happen.

Pakistan’s economy on the other hand is confronted with some serious weaknesses and challenges. Pakistan’s accumulated debt and liabilities as of March 2015 stood at around Rs 19,299 billion with GDP hovering around 4% as against debt and liability of Rs 6.691 billion at GDP of 8 % in 2007- meaning a three times increase in debt and liabilities with a 50% drop in GDP. This is a scary reality. More loans from the IMF and China with a struggling GDP growth will further escalate the issue in coming years.

Non-ending circular debt, continued subsidy to sustain loss-making business enterprises in the public sector and poor economic governance continue to dent and pull back the economic growth compounded by the fact that Pakistan’s revenue collection is reported to be one of the worst in the world. Energy shortages continue to eat up around 2% of the GDP in terms of loss in production and productivity in manufacturing, agriculture and commercial activities. Energy policies and implementation remain messed up.

Foreign Direct Investment (FDI) in Pakistan in the year 2014-15 stood at around $803 million as against $1667 million in 2013-14, recording an alarming drop of 46.8%. FDI is often confused with project financing from abroad. FDI refers to a long-term strategic participation by ‘country A’ into ‘country B’ usually involving management control/sharing in a subsidiary or a joint venture, transfer of technology and expertise and full or shared ownership of the business entity in the field of manufacturing, services or similar.

With a now better country perception around the world, the government needs to move out of its years of passive attitude and expose itself well to the outside world to attract FDI. New global business alliances are being firmed up. Nations of Emerging Economies comprising Brazil, Russia, India, China and South Africa (BRICS) are meeting this month in Russia to foster global business alliances. Pakistan, for the first time, has been invited as an observer and PM Nawaz Sharif is scheduled to participate in it. Also, the all powerful Shanghai Co-operation Organisation (SCO) will meet later this week. Pakistan and India are likely to get membership of this important bloc. All these opportunities should motivate Pakistan to regain its status as a promising Emerging Market and be part of these alliances.

Further, to capitalise well on the given opportunity, the country needs a robust GDP growth on the strength of local revenue generation and investments and the FDI, all of which is well below mark and need a major shake-up to achieve a sustainable economy to cater for the national needs and capacity to honourably retire the debt and liabilities. The government spending on the strength of the loans without corresponding increase in revenue is a sure recipe of a disaster.

There is a lesson to be learned from the current Greek financial meltdown, specially by countries whose financial sustainability is governed under the IMF funding programme, Greek became the first developed country to default onto an IMF repayment on June 30, 2015. The Greek debt crises started in 2009. The root cause is stated to be a combination of structural weaknesses in the Greek economy along with a decade-long pre-existence of overly high structural deficits and debt-to-GDP levels of public accounts.

The other persistent problem is the poor tax collection and low productivity. Each year it has remained below the tax target while the government spending on the strength of IMF loan was beyond the means. Tax evasion is reported to be widespread and the collection in some years as low as less then half of the revenue due. Black economy in Greece is stated to be around 24% of GDP.

While fund donors like the IMF duly support the country in need but expects timely repayments- the sole responsibility of which lies with the recipient country. There are no shortcuts nor fooling around. Default is an ugly option. Greece is the latest example.