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The way forward for Pakistan’s economy in 2018

Highlights of 2017
    8.5% growth in Large-Scale Manufacturing (LSM)

  • Inflation rate of 3.9%
  • Super strong growth in lending to the private sector
  • 74.4% growth in Foreign Direct Investment (FDI) worth $939.7 million
  • 19.5% growth in the Federal Board of Revenue (FBR) Tax Revenues and a double-digit growth in exports

Considering the mixed trends in the macro-economy, which includes challenges and opportunities, GDP growth is expected to remain between 5-6 percent in 2018. The economy is expected to benefit from accommodative macroeconomic environment, activities related to the China-Pakistan Economic Corridor (CPEC) and constantly improving energy supply and security situation. Pakistan’s annual GDP growth rate has touched five percent in 2016-17 after almost a decade. However, it is noteworthy that Pakistan was one of the high economic performers among developing countries over 1960-1990 and had a much higher economic growth than either India or Bangladesh. Unless Pakistan is able to revive its annual growth to a sustained 6 percent to 7 percent per annum, it will not be able to generate jobs needed for its large young population.

While one may debate about the state of Pakistan’s economy as glass half empty or full, economic indicators like private sector credit, investment and revival in agriculture had spill-over effect for trade and manufacturing sector. The positive spill-over of recovery in the global economy, particularly advanced economies, offers healthier trade prospects. Pakistan’s exports could also benefit from this evolving dynamic if exporters are able to diversify their export products at competitive prices. Growth prospects of Pakistan’s economy from fiscal year 2018 onwards would largely hinge on planned infrastructure projects and capacity expansion by industries. In order to make these plans a success story, enhanced coordination amongst all public-sector institutions would be more crucial. Also, continuity and consistency in policies, especially those related to investment and industry, would be necessary to ensure sustainability of the growth momentum.

On the flip side, the external and fiscal accounts may remain under pressure. On the other hand, growth in exports and workers’ remittances is expected to recover. The exports are expected to benefit from a recovery in global commodity prices and ease in energy constraints. This is particularly indicated by a double-digit growth in exports recorded during the first two months of FY18. In case of workers’ remittances, the initiatives under PRI could help in attracting more receipts through official channel. The key initiatives include new products for diaspora, extending the tie-up arrangements as practiced in case of GCC and UK to other sources of remittances like Malaysia and New Zealand and plans to further reduce the cost of fund transfers. Incorporating these developments, workers’ remittances are projected to remain in the range of $20 billion during FY18. Yet, the pace of increase in exports and remittances is likely to be slower compared to increase in imports. The economy is likely to continue to expand with low and stable inflation in FY18. 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.

 

There are seven areas in need of attention and strong policy action before strong and sustained growth can be revived.

  1. Incentivizing performing sectors (non-textile) to boost exports.
  2. Re-strategizing taxation.
  3. Re-thinking emerging energy mix.
  4. Focusing on investment and creating employment.
  5. Re-negotiating adverse trade deals.
  6. Re-prioritizing government spending.
  7. Transforming at least one public sector enterprise into a profitable entity.
Recommendations

Based on the above, following reforms are required that would further improve the economy:

  1. Promotion of capital formation and consolidation to improve competitiveness through withdrawal of Super Tax, restoration of group relief and focus on retention of reserves.
  2. Formulation of separate tax policy while withdrawing full and final tax regime for commercial importers which will discourage under-invoicing.
  3. Creation of jobs by supporting local industries through import substitution.
  4. Creation of long term debt market to fund mortgages, credit and local infrastructure.
  5. Through simplification and digitization, making it easier to do business.
  6. Enhancement in the technological capacity of FBR to harvest data on non-filers and penalizing them.
The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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