Pakistan economy to grow in 2016 despite challenges

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Pakistan economy to grow in 2016 despite challenges
Large scale manufacturing output rose to 3.9 per cent in the first quarter of fiscal year 2016.

Implementation of CPEC, manufacturing to boost growth.

By M. Aftab/Analysis

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Published: Mon 25 Jan 2016, 6:22 PM

Implementation of China Pakistan Economic Corridor, or CPEC, rising large scale manufacturing and the upcoming infrastructure projects in the West-Central Asia Zone are some of the strong business indicators that central bank has outlined as factors, which will boost Pakistan's economy in 2016.
Overall there is good news and hope of good prospects. But, State Bank of Pakistan, or SBP, also indicates several challenges, which must be tackled. It said: "Some improvements are already visible from the changes in the key macroeconomic indicators. Economic activity seems to be gearing up as large sale manufacturing, or LSM, has recorded a noticeable increase over the last year."
LSM output growth rose to 3.9  per cent in the first quarter of fiscal year 2016 from 2.6 per cent in like period of FY-2015. The growth of the economy was confirmed by "the strong profitability of the banking sector", in spite of the currently declining interest rates and their reduced spreads. The interest rate decline is pushing the private business greatly. A "visible improvement in the transport sector, storage and communications are key positives." 
The SBP also unveiled ongoing and upcoming challenges in its review of the economy in the first quarter (July-September) of FY-2016. The SBP's report "State of the Economy" indicated the sectors, which are performing well. It said that a large number of projects will also benefit "due to the progress in implementation of the CPEC projects. Some of them are already under way. They include construction of the Gwadar Port-related projects in South-West Pakistan, on Arabian Sea and Straits of Hormuz.
Some two dozen huge industrial areas have been marked down to establish industries, banking, energy and service projects to be loaced from Gwadar to China as part of the CPEC. The first phase of CPEC with an investment of $46 billion is slated to be completed by end-December 2017 or early 2018, Ahsan Iqbal, Minister for Planning said.
The SBP also reported that the economy is likely to benefit from improvement in the security conditions and successful and continued fight against terrorism, better availability of electricity and gas, lower cost of imported indusial raw materials and the historic low interest rates. The interest rates were lowered to around six per cent for the private sector under SBP's easy monetary policy. The policy slashed the interests rates, charged by the commercial banks, to an 11-year low of six per cent. But it dos not mean "all is well."
The report said, notable improvements in the key macroeconomic indicators have been observed during the first quarter of FY-2016, however, much needs to be done to ensure their sustainability. "The current SBP projection is that a GDP of 4.5 to five per cent is likely to be achieved in FY-2016," rather than 4.5 to 5.5 per cent envisaged by the government. Both imports and exports posted a decline. The fall in impost was more pronounced, which reduced the trade deficit by 22.4 per cent during the quarter, together with a modest increase in remittances sent by Pakistanis working abroad and inflow of US funds to fight international terrorism.  
These inflows narrowed the current account deficit to only $35 million, as against $1.6 billion in the like period of fiscal year 2015.
The total forex reserves rose by $14 billion to reach "an all time high of $20.1 billion. At the same times SBP recorded a 2.6 per cent depreciation in the value of rupee against the US dollar. The SBP said: "The rupee-dollar exchange rate, which anchors inflation expectations of business community and directly impacts domestic prices, has created an upward pressure on inflation. However, this impact was more than offset by the swift pass through of a fall in the international commodity prices to the domestic consumers during the quarter."
The SBP report noted a marked improvement in the security conditions, better energy management, and the persistently low global commodity prices, "the government had envisaged GDP growth of 5.5 per cent for FY-2016 anticipating better performance in all three economic sectors compared with last year as summer crops incurred losses due to depressed prices of agricultural products and unfavorable weather conditions."
"However, initial assessment suggests that achieving 5.5 per cent GDP target will be challenging."
SBP projected the consumer price index, or CPI, in the range of 3.5 to 4.5 per cent, visibly lower than the inflation target of six per cent, down from eight per cent in the like period of FY-2015. This is based on CPI survey conducted in November 2015.
Yet another sign of hope is the fact, "the current account deficit has narrowed down as it was comfortably financed by higher financial inflows, the foreign exchange reserves recorded an all time high and rose to more than $21 billion which are sufficient to meet the country's import bill for seven months.
The business, particularly foreign investors and companies operating in Pakistan, are happy over their prospects and profits. Atif Bajwa, president of Overseas Investors Chamber of Commerce Industry, or OICCI says their latest Perceptions and Investment Survey 2015 indicates 82 per cent of members foresee continuing growth in their business, and are generally committed to making further investments in Pakistan. The survey also indicated that the OICCI members plan to invest $3 billion in their business and industry in the foreseeable future.
Views expressed by the author are his own and do not reflect the newspaper's policy.
The SBP was of the view that while the positive developments, noted above, are welcome "much more needs to be done to ensure their sustainability," said Ashraf Wuthr, Governor of the central bank.
Some of the recommended steps required include:
*Tax collection has to be stepped up to keep the fiscal deficit down, and to keep expanding development spending.
*The programme of selling of the public sector entities, or PSEs, should be stepped up in order to stop spending on their accumulated liabilities and meet their losses.
* The overall exports, down for the last three years, should be raised so that they can support the external accounts' sustainability.
* The colossal loss and theft of electricity should stopped.
* While it is encouraging that FDI from China is likely to increase due to the projected spending on various infrastructure projects being built under the CPEC programme Pakistan also needs foreign investment in the exportable sector.

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