Structural Weaknesses of Pakistan's Economy

1

Dr. Vaqar Ahmed 11th March 2014

Long term sources of

growth

Labour

Capital

Productivity

Short term drivers of growth

Energy

Water

Simplistic View – Pakistan Economy

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Pakistan South Asia

Fixed Investment 1961 - 2012 Economic Growth 1961-2012

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Gross Domestic Savings 1971-2011

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Government Revenue

Government Expenditure

Fiscal Performance 2001-2012

Inflationary Pressures

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2007 2008 2009 2010 2011 2012

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Pakistan

South Asia

Pakistan had higher price levels in comparison to its neighbors. While South Asian economies also maintained high subsidies, however they were better targeted and prudently financed

Current Vs. Development Expenditure 2001-2012

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Current Expenditure

DevelopmentExpenditure

Debt servicing, defense, law & order have not allowed government’s current expenditures to come down. This also implied lesser expenditure availability for MDGs

Spending on Education & Health

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Education Spending

Health Spending

Education and health expenditures are compromised first once current expenditures increase. The also impact longer run productivity of the economy

External Performance - I

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Current accountbalance

Exports of goods andservices

Imports of goods andservices

External Performance - II

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Remittances

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External Debt Outstanding

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2007 2008 2009 2010 2011 2012

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Foreign Direct Investment

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Net Forex Reserves

Rising remittances and debt contribute to Dutch disease effect

Real Sector Outlook

Indicators 2012-13 (Provisional)

2013-14 (Projected)

Economic Growth (%)

GDP Growth 3.6 4.4

Agriculture 3.3 3.8

Manufacturing 3.5 4.5

Services 3.7 4.6

Investment and Savings (as percent of GDP)

Investment 14.2 15.1

National Savings 13.5 14.0

Foreign Savings -0.7 1.1

Inflation (% Growth) 7.7 8.0

GNP Per Capita (PKR) 1368 1464

Source: Economic Survey of Pakistan and Planning Commission’s Annual Plan 2013-14

Fiscal Sector Outlook

Indicators 2012-13 PKR Billion

2013 (July-Dec) PKR Billion

Total Revenue 2982 1685

Tax Revenue 2,199 1172

Total Expenditure 4,816 2225

Current Expenditure 3,660 1888

Interest 991 598

Defense 541 295

Development Exp. 1140 326

Fiscal Deficit 1834 540

Fiscal Deficit (% of GDP) 8.0 2.1

External financing 1676 43

Domestic financing 1836 584

Source: Finance Division, Government of Pakistan

Balance of Payments

Indicators 2012-13 USD Million

2013-14 (Jul-Jan)

USD Million

Exports (fob) 24802 14712

Imports (fob) 40157 24433

Workers’ Remittances 13922 9033

Current account balance

-2496 -2055

Foreign Direct Investment

1456 523

Long term loans 2274 1043

Foreign Exchange Reserves

11,019 7,988

Source: State Bank of Pakistan

Less than 1.5 month import bill available to provide for Letter of Credits, & imports for food,edible &crude oil

Monetary Sector Flows

Indicators 2012-13 PKR Million

Up to 21-Feb-14 PKR Million

Net Foreign Assets -263,300 -146,167

Net Domestic Assets 1,479,317 579,390

Net Government Borrowing

1,479,183 415,047

Credit to Private Sector -19,041 280,689

Credit to Public Sector Enterprises

31,096 58,143

Broad Money (M2) 1,216,017 433,223

Percent Growth 15.91% 4.89%

Source: State Bank of Pakistan

• Three Year Under Extended Fund Facility (EFF), with focus

on structural reforms

• Access to 425 % of Quota; Amount $6.6 billion

IMF Program

• Level of Net International Reserves; Size of Budget Deficit; Borrowings from SBP*; Stock of SBP foreign currency swap/forward position*; net domestic assets of SBP at end of each Quarter

Structural Benchmarks (not met in the 2nd Review)

• Amend Law for SBP Autonomy (March 2014); Privatise 26% of PIA to strategic Investor (Dec 2014); Issue Tax Notices to 75,000 Non-Filers (March 2014); Eliminate SROs (June 2014)

Performance Benchmarks

2013-14

MACROECONOMIC STABILIZATION

Balance of Payments

• Improve Balance of Payments from Deficit of $2.3 billion to surplus

of $ 4.6 billion

• Raise FE reserves from $6 billion to $ 9.6 billion by end of 2013-14

BUDGET

• Reduce fiscal deficit to 5.8 % of the GDP from 8% of GDP

Macroeconomic Stabilization Targets

Balance of Payments

• Depreciate the Rupee (REER to fall by 8%)

• Interest Rates to rise with Rate of Inflation

• Higher inflow of Aid from World Bank, ADB, etc., due to Program

Budget

• Taxation Proposals in Budget of over Rs 200 billion (GST, direct

taxes etc)

• Subsidy reduced by substantial Jump in Power Tariff

• Higher taxation of Gas

• Cut Development Expenditure by 25 %

Policy Targets

At the End of First Six Months of 2013-14

Projected FE Reserves by IMF at end – December of $ 5.4 billion; Actual

Reserves of $ 3.4 billion.

Therefore, program is already off-track

Projected depreciation of Rupee in the Program of almost14 percent in

2013-14; Already 6 percent in the first six months

Budgetary Position is better at 2.2 percent of the GDP in first six months of

2013-14; but almost Rs. 500 billion printing by the Central Bank (SBP)

FBR revenue growth of 17 per cent; as compared to target growth rate of 23

per cent

‘Core` Inflation rate close to 9 percent; compared to annual projection of

below 8 percent in the program

Six Monthly Position (2013-14)

• Level of Foreign Exchange Reserves by end June 2014 will hinge on the following large capital inflows:

i. CSF of $ 900 million

ii. Privatisation receipts of $ 800 million

iii. 3-G Action of $ 1200 million

iv. Higher Program Assistance of $1000 million by Donors

v. Euro bond flotation of $ 1000 million

vi. $ 1100 million from IMF subject to meeting program Criteria

• Size of the Current Account Deficit, Projected at $ 2.3 billion for 2013-14; Already $ 2 billion in first seven months

• Therefore, considerable uncertainty about the level of FE reserves

Some Risks

• FDI in textile sector – Chinese example

• Critical question of energy supplies to energy

• Building value chains – Bangladesh example

Will GSP+ Deliver?

Structural Reforms Short-term

• Eliminating SROs and related exemptions

• Tax administration and human interference

• Debate on including new sources of income in the tax net

– Agriculture

– Services

– Capital and money markets

Taxation Reforms

• Correct energy prices

– To cover full cost of production

– To correct incentives for private sector

• Eliminate untargeted, hidden and cross subsidies

– Retain only for life line block

• Check technical losses and theft

– Transmission and distribution losses

– Kunda methods

Energy Reforms

• Restructuring liabilities and outstanding debt

• Empowering management with autonomy

– NBP and Finance Secretary [Conflict of Interest]

• Private participation in state enterprises

– Public Private Partnerships

– Privatization

Public Sector Enterprises

• Trade in goods (Afghanistan, China and India)

• Trade in services (Afghanistan and China)

• Trade in energy (Iran and India)

Regional Trade

• Pakistan’s economy not comfortably positioned, even in the presence of

an IMF program: Dr. Hafiz A. Pasha

• Implications of gift payments by Saudi government not known

• Improvement in the economic situation will also hinge on

o The Security Situation

o Electricity situation – as summer months approach

• If Pakistan manages to build up reserves of $7 billion or so (1½ month’s

import cover) by June 2014 then conditions will improve in 2014-15 and

beyond as net receipts will take place from IMF: Economy of Tomorrow

Report

• Pakistan can then start a program of economic revival and try to

achieve 6 per cent growth rate by 2016-17: Economy of Tomorrow

Report

Way Forward

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