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Cover Stories - Pakistan economy in 2018: swinging between hope and despair.

Byline: K. M. A. Naqshbandi

As the year ended amidst political uncertainties and disruption in financial management due to the absence of a full-fledged Finance Minister the challenges ahead for Pakistan's economy has touched unprecedented height and therefore, requires a very careful planning and cautious scheduling of disbursement. Due to the fall in Rupee the economy has suffered. It may be mentioned here that when the central bank withdrew its support on December 13th, Pakistani rupee was hit hard, adversely affecting the currency. Pakistani rupee has always remained between 104 and 105 per dollar since 2015, but in last three sessions it lost its value by over 5 percent. Currency's level always has a direct bearing on various aspects of the economy. The outcome of the devaluation of Rupee against US dollar in the domestic market incidentally coincided with a rise in the crude oil prices in the global market resulting in an upward trend in oil prices from January 2018.

The trend will obviously result in increase in the manufacturing and transportation cost resulting in price hike of all the commodities produced locally. Thus in 2018 the country may witness considerable price hike. Finance managers of the country must therefore, take all possible measures to maintain price hike to an acceptable level.

With no major change in extreme issues like electricity and gas shortage, unemployment, and poverty, Pakistan may continue to face the problem of fiscal consolidation. The absence of practicable ideas based on ground realities to deal with the changing circumstances, may turn out to be the government's most significant weakness to maintain financial discipline and economic harmony. On the other hand balance of payments issue may pose very serious risks to economy during the next fiscal year, mostly because of ballooning deficits and erosion in foreign exchange reserves down the line. The business community also expects the next year to be full of challenges. They argue the country requires paying $12 billion in first half of 2018 as per its liabilities. "Exports can grow by more than 20 percent in 2018 provided that government reduces energy prices reasonably with the consent of stakeholders," a business leader said.

Keeping in view the liquidity position the government may be left with no choice but to cut its non development and administrative expenditures to reduce fiscal deficit. The debt servicing is also a major non development expenditure that is hampering the economic growth badly.

It may be mentioned here that the economy of Pakistan is the 25th largest in the world as far as purchasing power parity (PPP), and 38th largest concerning nominal gross domestic product. Pakistan has a population of over 200 million (the world's 6th-largest), giving it a nominal GDP per capita of $1,550, which ranks 132nd in the world. However, Pakistan's undocumented economy, according to a rough calculation is estimated to be 36 percent of its overall economy, which is not taken into consideration when calculating per capita income. Pakistan is a developing country and is one of the Next Eleven, the eleven countries that, along with the BRICS, have a potential to become one of the world's large economies in the 21st century. There is no doubt that Pakistan is a land of opportunities but the sad fact is that it has never been tapped sincerely and honestly.

For instance Reko Diq Mine, famous for its vast Gold and Copper Reserves and believed to have the world's 5th largest gold deposit, remained untapped just because of reason best known to the authorities. The project was supposed to bring over $5 billion of FDI in the most impoverished province of Pakistan and now, instead it is potentially poised to take away billions of dollars in damages! How did we come to this? Time has come for our financial gurus and planning experts to come out with a convincing answer to such burning questions.

There is indeed something to rejoice also. For instance the supply of power to industrial and residential consumers is expected to improve considerably with new power plants likely to become operational in 2018 and beyond. Moreover, developments like import of liquefied natural gas (LNG) to improve the shortage of gas for industrial sector and the addition of a second LNG terminal at Port Qasim would go a long way in boosting the economy. The number and fierceness of terrorist incidents is declining which will very positively affect the investment market as the foreign entrepreneurs reluctant to come in Pakistan will start coming in. These positive developments supported by a very well planned fiscal policy may help in stabilizing the economy. But then the future course of our economy will largely depend on the institutional aspects of an economy or society, covering features such as corruption, transparency, rule of law, the burden of regulations, the extent of trust and social capital and so on.

Pakistan's GDP growth, according to a recent report by Moody's Investors Service, is expected to be closer to 5 percent in both fiscal year 2017 and 2018, while the fiscal deficit will be wider than expected. Situation is expected to improve rapidly if the Privatisation Commission is able to get rid of white elephants like Pakistan Steel Mills, PIA and few other organizations now surviving on heavy grants from the government.

It is hoped that the existing political uncertainty will fade out with the passage of time, potentially affecting new investments in the country. As we know companies, especially foreign ones, are not interested to know which party forms the government, what they actually care about is political certainty and sustainable economic policies so that they can better plan their long term investments and profit margins. As such the political point-scoring and differences in points of view of the government and opposition parties can never go down well among those who are carefully monitoring the situation, be it political or purely economic.

Owing to weak domestic policies and slow world economic growth, Pakistan is not getting enough FDI. The government is also facing pretty tough challenges to increasing tax revenues by eliminating structural flaws in the tax system. Just when the economic growth should be touching 6 to 7 percent to provide jobs to the growing workforce, the government is failing to take it to even 5 percent. According to Asian Development Bank (ADB) Outlook in fiscal year 2018, projections for growth and inflation are maintained, but the current account deficit is expected to exceed the earlier forecast again by a wide margin.

State Bank predicts that on the flip side, the external and fiscal accounts may remain under pressure. This pressure is coming from likely elevated import demand and increase in public spending, by provincial governments in particular. The increased spending by the government is to complete development projects before the upcoming general elections in the country.

The current account deficit is projected to remain around last year's level, that is, in the range of 4.0 to 5.0 percent of GDP, State Bank of Pakistan (SBP) report stated. The fiscal year 2018 budget envisages fiscal deficit at 4.1 percent of GDP. Achieving this target may be challenging, given the capital spending requirement of the government for completing various projects under CPEC and likely increase in provincial spending during the election year. Moreover, any shortfall in revenue may keep the fiscal deficit close to fiscal year 2017 level. Thus, the current account is likely to settle between $4 billion to $5 billion and fiscal deficit will remain between $5 billion to $6 billion. The economy is likely to continue to expand with low and stable inflation in fiscal year 2018. Encouraging trends in private sector credit indicate underlying dynamics in real economic activity.

However, maintaining this momentum going forward would largely depend on addressing emerging challenges in external and fiscal accounts, the report added.

Finally a lot has been written about CPEC which is expected to change the economy of Pakistan. It is undoubtedly a massive project which offers huge economic benefits to the people of Pakistan and the region. According to recent estimate CPEC will serve three billion people, nearly half of global population. Thus a huge economic bloc is about to emerge from this region, in fact, from Pakistan. With the completion of CPEC Pakistan will become a connecting bridge to three engines of growth; China, Central Asia, and South Asia. It will create a large number of jobs and shall elevate Pakistan to high growth rates which will ensure Pakistan's stability and will serve as a deterrent against extremism and violence. The value of CPEC projects is now worth $62 billion. CPEC is intended to rapidly modernize Pakistani infrastructure and strengthen its economy by the construction of modern transportation networks, numerous energy projects, and special economic zones.

On 13 November 2016, CPEC became partly operational when Chinese cargo was transported overland to Gwadar Port for onward maritime shipment to Africa and West Asia.

All said and done World Bank Report also does not predict any significant positive economic growth in Pakistan. The report said that Persistent policy uncertainty could dampen confidence and investment. Amid exceptionally low financial market volatility, a sudden market reassessment of policy-related risks or of the pace of advanced-economy monetary policy normalization could provoke financial turbulence. Over the longer term, persistently weak productivity and investment growth could erode long-term growth prospects in emerging market and developing economies that are keys to poverty reduction.
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Publication:Pakistan & Gulf Economist
Geographic Code:9PAKI
Date:Jan 7, 2018
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