Today after eight months of the present Government, and at the time when the second review of the IMF is completed, it is important to look back on what have we achieved over this period and see whether the economic course chartered out by the PML (N) has produced results.
With the grace of Allah, all major indicators of economy are pointing to the fact that economy has begun to show signs of revival and that it is moving on the right track. Of course, challenges remain on the horizon and much work remains to be done. The key to continued success would be to remain on course and avoid distractions that can sway energies in undesirable directions.
On 5th of June 2013, when Mohammad Nawaz Sharif was sworn in as the Prime Minister, there were no two views that the economy of Pakistan was in tatters. While long power outages had disrupted normal life completely it had stifled economic growth, and there were reports that private businesses were moving out of the country. A glance on the previous five years figures would make it abundantly clear that the economy had come to a standstill. Economic growth was paltry 3%, double-digit inflation continued for 4 straight years (the longest spell of double-digit inflation in the history of the country), interest rates remained high, budget deficit was touching 8.8% of GDP for 2012-13 (and was brought down to 8% with savings in expenditure), investments reduced to historic lows, and foreign currency reserves available with the State Bank of Pakistan were sharply falling. With huge repayments falling due from a previous IMF loan, the stark reality of a default was looming large.
The PML (N) brought in a strategy to rebuild our economy. First and foremost, our immediate priority was to focus on two important economic related issues; 1) Electricity, and 2) Economy including stability of dwindling foreign reserves. Within the few weeks of taking charge, we set out a short, medium and long-term action plan for improving electricity situation, and announced Power Policy 2013. Our prompt response was clearance of liabilities in the electricity system – known as the ‘circular debt’. The previous Government had not paid the dues of energy companies, which had practically choked the entire system – from electricity generation, to distribution to procurement of furnace oil. Our first level stock analysis revealed that these liabilities amounted to over Rs.500 billion. Upon clearance, around 1,700 megawatts of electricity were immediately made available that resulted in reduced load shedding benefiting people and provision of electricity to business and industry. Secondly, to avert default on our loan obligations, and to gain international acceptance of our economic strategy, we approached the IMF. This time, we did not need large sums of money – as it was the case in the previous IMF program signed in October 2008. As part of that program, Pakistan has to repay more than US $5 billion during 2013-15 periods including US $3 billion which has become due in the current fiscal year 2013-14. We therefore, had no choice other than re-engaging ourselves with IMF for a new loan program.
Having tackled these two immediate issues, PML (N)’s next step was to start its economic rebuilding plan. While our plan is detailed in our party Manifesto, I will highlight four keys areas. Firstly, we presented an austerity budget by cutting wasteful expenditure, reducing number of Ministries, and abolishing discretionary grants of the Prime Minister and Ministers. The austerity was not imposed on allocations on social protection – on the contrary these allocations were increased from Rs 40 billion to Rs 75 billion so that the poor and needy could be helped as they have suffered adversely due to high inflation in the last few years. Secondly, our priority is to increase tax revenues so that the Government can invest in essential human and physical infrastructure – like building water dams to generate cheap electricity and enhance availability of water. We have aimed to increase the tax revenue from 8.5% of GDP to 9.5% of GDP in the current fiscal year. Thirdly, we abolished the system of general subsidy on electricity in which the rich were provided with subsidy from the Government. Our revised subsidy policy only targets the poor and low income segments of the society. Fourthly, to increase investments in the country the Prime Minister announced three incentive packages; 1) for the youth of Pakistan – the Prime Minister announced loan scheme, fee reimbursement scheme, laptop scheme, etc., 2) for businesses the Prime Minister announced incentives to increase their business footprint in the country – this is especially important as only lately, due to diplomatic efforts, Pakistan has been awarded duty-free imports by European countries through GSP+ status, and 3) a deregulation plan that includes greater role of private equity in businesses that had been mismanaged by successive Governments.
Our strategy for rebuilding of the economy has received international recognition but at the same time an extensive debate ensued in the local media. A furore was raised in the media as the dollar was traded at just under Rs 111. On balance, economists voiced their concerns on the difficulties summoned by agreeing to a program that would again seal the reputation of Pakistan as a ‘single tranche country’. It was also hammered that there were hidden provisions that would result in major devaluation of the currency, increase inflation and force wholesale auction of public sector assets at throw away prices.
While economic strategies take time for results to emerge, one can share some early fruits of the plans.
Economy has started to grow: The quarterly national accounts, first time released by the Pakistan Statistics Bureau, point to a GDP growth rate of 5% in the first quarter of 2013-14, compared to 2.9% in the first quarter of 2012-13. This early indicator of improved growth performance has been punctuated by other developments in the service and industrial sectors, reaffirming the brighter prospects of growth in the country. The large-scale manufacturing sector has posted a growth rate of 5.2% during the period Jul-Nov 2013-14 compared to 2.2% for the same period last year. The key sectors showing growth include fertilizer (33%), paper and board (20%) electronics (19%), and textiles (2%). This growth is also reflected in better domestic sales tax collections, which rose by nearly 30% during this period. Two other developments further strengthen the view that the growth momentum is gradually picking up. First, the flow of credit to the private sector has increased manifold. From a meagre amount of Rs.53 billion in the first six months of 2012-13, credit to private sector increased to Rs.231 billion, much of it was for fixed investment. Second, there was an increase of 26% in the imports of machinery. All this clearly indicates the rising economic activities that would in turn increase the growth rate.
Inflationary pressures have started to ease: As compared to inflation in November 2013, prices in December 2013 and January 2014 have witnessed reduced momentum. Barring the volatile items of food and oil, inflation is stable in the single digit territory. The Government is trying its best to control these pressures even further.
Budget borrowings have reduced drastically: As against an IMF target of 3.5% for the first six months, budget deficit has been recorded at 2.2%, even better than 2.6% actual recorded in the same period last year. This is due to better revenue collections as compared to last year, and more managed expenditure control.
Exports are picking up: The exports (fob) were up by 3.2% in the first six months, compared to the same period last year. The most significant increase was recorded in textiles exports, which increased by 8%.
Home remittances: Remittances in the first six months have recorded a growth of 9.5% indicating a healthy growth over a high base and much above the target growth of 6%.
Rupee has stabilised: Sensing some exchange rate movement on the face of declining reserves and IMF program, the speculators had started playing manipulative games that affected the exchange rate several times during the last 6 months. Effective measures were adopted to combat these efforts. The efforts included: a) Increased supplies of dollar notes in the market; b) Measures to ensure timely receipts of export earnings; c) Appropriate actions for containing imports of gold, including recent ban, to avert smuggling to neighbouring countries; and d) Tough signals of administrative and regulatory actions against the speculators. These measures have brought exchange rate stability and it is trading steadily around Rs.105/$-106/$ range without any significant speculative activity. It may be noted that exchange rate is not a policy instrument of the government neither does the government has any role in its setting. However, it is the responsibility of the government to ensure that the open market dealers, generally, and inter-bank players occasionally, are not engaged in manipulative games.
Reserves have moderately stabilised but are expected to grow in coming months: The difficult days, in which a Fund program was managed without having had the support of significant upfront support, are behind us and in the days and months ahead we will see continuous build-up of reserves. A modest assessment suggests that at the close of March 2014 the reserves will be in the double-digit territory.
Stock exchange is thriving: Vibrancy in the stock exchange is the reflection of investor confidence. Over the past seven months, Karachi Stock Exchange has performed better when compared with a host of other stock exchanges around the World.
While there is good news on many fronts, there are also areas where we need to concentrate even further. Our challenges include increasing investments both from domestic and foreign sources so that job creation can be enhanced, building up of reserves without incurring high debts, increasing tax collections and employing better ways in using them, managing our national assets in a more productive manner, and focusing on human development.
Going forward, we are rolling out further initiatives under our strategy for economic rebuilding. While I will not go into details, some important initiatives include deregulation, increased investments to enhance energy security, undertaking of structural reforms to improve management of public finances especially improvement in tax collections, making Pakistan an attractive investment destination, and a new economic growth policy.
We claim no monopoly on wisdom, but we do submit that the economic policies pursued by the government coupled with the program we had formulated have been implemented with sincerity and utmost concern for the betterment of the country and the welfare of the common man.