Pakistan back on growth path

Buoyed by FY-14 results, businesses and economy set higher targets for FY-15

By M. Aftab (Analysis)

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Published: Mon 28 Jul 2014, 9:40 AM

Last updated: Fri 3 Apr 2015, 7:04 PM

Buoyed by better FY-14 results, Pakistan businesses and economy set higher targets for FY-15, which has just begun. Rupee has stabilised against the dollar and major currencies, it is in the range of 98.50 to 99 against the dollar, up from 109 only months ago. The bourses are shooting to all-time high of over 30,000 points and outlook for them to go higher, turning them into Top-10 in Asia. Gross domestic product (GDP) is rising to 4.1 per cent. Forex reserves level has crossed $14 billion from less than $6 billion in the last days of previous government. The reserves rose on the back of a $1.5 billion friendly help from Saudi Arabia, borrowing of $2 billion in euros, though at high cost, and assistance from other sources. The latest to add to the laurels claimed by the government is its economic performance, which led Moody’s to raise Pakistan’s foreign currency government bonds rating to Caa1 and the prospects of big five banks ratings, which improved from negative to stable. Finance Minister Ishaq Dar is confident that the ongoing series of economic and foreign currency reforms will improve the ratings further.

This week the forex reserves were $14.450 billion, State Bank of Pakistan (SBP) says. These include $9.399 billion owned by the SBP, while $5.051 billion held by the commercial banks.

But on the negative front, there are difficulties, too. The foreign debt, for instance, rose to $66.1 billion, which is 21.5 per cent of the GDP at the close of first year of Pakistan Muslim League-Nawaz (PML-N) rule, up from $59.8 billion or 19.6 per cent of GDP at the end of Pakistan People’s Party (PPP) government in early 2013. Analysts project that the external debt will rise further to $79.3 billion by FY-18, as the government’s borrowing spree to build up forex reserves continues.

The government of Prime Minister Nawaz Sharif, just a year into ruling, and his two ministers — Finance Ministers Ishaq Dar and Planning Minister Ahsan Iqbal, are particularly happy over what they have achieved since June, 2014. They, Sharif and their ruling PML-N, are particularly happy to break the logjam into which the economy and the business stayed during five years of the PPP rule during 2008-2013. The economic mismanagement, was the key to the party’s defeat in the May, 2013 elections.

However, the fact remains that the PML-N detractors, and several economists and analysts question the government-claimed achievements and describe them as exaggerated and their report card statistics as “fudging”. Mohammad Yaqub, a senior IMF director and former Governor of SBP, the central bank, maintains that IMF has picked up these “fudged” statistics from the government’s “exaggerated and manipulated statistics fed by Ishaq Dar. The GDP growth figure claimed by the government to have rose to 4.1 per cent is one such key example. Most economists and experts believe that the growth did improve in FY-14, but it was closer to 3.7 per cent — although still better than the lows of the PPP years.

External sector has shown a slow improvement as in the case of exports. Exports in FY-14 rose a mere 2.75 per cent to $25.131 billion — up from $24.460 billion in FY-13.

Textile exports in FY-14 rose 5.3 per cent to $13.738 billion partly on the back of EU granting Pakistan GSP Plus status, and major concessions in import duties, from January this year. Textile exports in FY-13 were $13.047 billion. In case Pakistan can manage its current energy crisis better and reduce the power and gas outages to the textile industry, exports to European Union and globally can rise much higher, the industry insists.

Imports rose $45.112 billion in FY-14 — up 0.36 per cent, from $ 44.950 billion in FY-13, SBP says. The import of two key items, oil and food, which consume huge amounts of forex, declined a bit by 0.73 per cent in fy-14 to $19.02 billion, compared to $19.16 billion in FY-13.

Pakistan has seen high inflows from several sources during FY-14, but still the current account deficit widened to $3 billion which is more than last year. “Rising imbalances on every front pushed up the deficit very high, despite high inflows during the year,” SBP reports.

Foreign investment in FY-14 set a five-year record as it rose to $4.3 billion which helped the SPB built up its forex reserves to over $9.0 billion from $2.5 billion a year ago.

These positive developments notwithstanding, in the external accounts, the big foreign trade deficit imbalance continued. It widened the current account deficit to $2.925 billion in FY-14, compared to $2.496 billion in FY-13. The deficit in FY-13, was $2.496 billion, but other relative indicators were in the red. These included poor forex reserves, and a deepening fall in the exchange rate parity. Substantial foreign inflows were not on the horizon, and multilateral sources like IMF were not ready to help.

Most of this changed in FY-14 with pro-business Sharif government coming into power. Beside the multilateral lending agencies, other sources came up to assist Pakistan. These included the big offer from the Eurobond market of more than $5 billion of which $2.0 billion was picked up, rather tan the initial plans of just borrowing $500 million.

The help from the overseas Pakistanis, working in Dubai-UAE, GCC, Saudi Arabia, UK and US, needs a big applause. They sent home the highest ever amount of $15.8 billion during FY-14. The government is now devising plans to raise the level f home remittances more and more. This will be undertaken by providing more incentives.

This is why analysts are of the view that the widening of the current account in FY-14 poses no threat to the Pakistani business and the economy. This positive environment should boost all sectors, including foreign trade, home remittances, and FDI inflows.

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