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First 100 days of PTI: dreams to materialize gradually

The grand ceremony held in Islamabad to mark completion of 100 days of Prime Minister Imran Khan’s government may have been illustrious, but certainly fall short in proving that much has been achieved. During election campaign and soon after attaining majority to form the government, Pakistan Tehreek-e-Insaf (PTI) leader Imran Khan painted a canvas that was too large, faced hostile domestic opposition and unfriendly attitude of United States and India, keen in establishing their hegemony in the region. Sole surviving super power and over-ambitious regional super power seem adamant at derailing Khan’s plan because of the attention Pakistan has started receiving due to fast changing geopolitical situation in South Asia and Middle East and North Africa (MENA).

As stated repeatedly, Pakistan suffers from three contentious deficits: budget, current account and trust deficits. While the first two are the outcome of bad governance, the third is external. The global and regional super powers not only indulge in cross border terrorism through proxies, but also create anti-Pakistan hype. The US manta of ‘do more’ and Indian allegations of cross boarder terrorism are Omni-present. This time the US attitude has become more hostile due to its defeat in Afghanistan, which is resulting in imposition of more stringent conditions by the lender of last resort, International Monetary Fund (IMF).

While one does not doubt sincerity of Khan and appreciate his focus on recovering looted money, he has not been able to contain trust deficit. Hike in interest rate and tariff of energy products has not only been eroding competitiveness but allowing opposition to say that more and more people are being pushed below the poverty line. At time one is surprised at the amateurish attitude of his team, which has been failing in understanding the ground realities and taking prudent measures. It is true that Pakistan suffers from fiscal deficit and efforts have to be made to follow austerity, but economy has not been put on growth trajectory. The first target should have been improving capacity utilization and then creating new productive facilities rather than boosting revenue collection through imposition of new taxes or increasing rates of existing taxes.

Inflow of one billion dollar from Saudi Arabia has delayed Pakistan’s default but not raised country’s foreign exchange reserves to a sustainable level. As the influx of funds from other friendly countries is being delayed, the focus must shift to IMF. The delay in concluding arrangement with IMF is increasing uncertainties. The latest announcement by the central bank indicate paltry increase in reserves, as only one billion dollars have been received from Saudi Arabia, as against a pledge of three billion dollars. In the prevailing scenario rupee is witnessing erosion in value against US dollar. Rupee depreciated by around 6% in early hours of the interbank market on Friday to around Rs142 compared to close of Rs134 on Thursday. In fact rupee has now depreciated by around 22% during the current calendar year and 26% during the last 12 months. Since Imran Khans’ government has come into power, rupee is down 10%.

According to State Bank of Pakistan (SBP), the economic data shows that the positive impact of recent stabilization measures has started to materialize gradually. The current account deficit is showing early signs of improvement. However, the near term challenges to Pakistan’s economy continue to persist with rising inflation, an elevated fiscal deficit and low foreign exchange reserves.

 

Average headline CPI inflation during the first four months of FY19 has increased to 5.9% as compared to 3.5% in the corresponding period of FY18. Although the recent decline in international oil prices could potentially play a positive role in slowing down the current inflation trajectory the risks currently remain tilted towards the downside.

The economic activity is expected to witness a notable moderation during FY19 reflecting a short term cost of pursuing macroeconomic stability. The lagged impact of the 275 basis point increase in the policy rate since January 2018 and other policy measures is likely to contain domestic demand during the current fiscal year. Furthermore, initial estimates for major crops, except wheat, are expected to fall short of levels achieved in the last year. The slowdown in commodity producing sectors is expected to limit the expansion in the services sector as well. In this backdrop, SBP projects real GDP growth for FY19 at slightly above 4.0 percent.

On the external front, import growth decelerated to 5.8% during Jul-Oct FY19 from 26.3% recorded in the same period last year reflecting the impact of recent tightening measures. Even this growth in imports is mainly explained by an increase in the oil import bill because of higher international oil prices, as against this, non-oil imports contracted by 4.0% in the first four months of FY19. This, along with a continued increase in exports and workers’ remittances, narrowed the external current account deficit from US$5.1 billion in Jul-Oct FY18 to US$4.8 billion in Jul-Oct FY19; a net improvement of 4.6%. Despite these positive developments, SBP’s net liquid foreign exchange reserves remained under pressure falling to US$8.1 billion as of 23rd November 2018 from US$9.8 billion at the end of FY18.

In the first four and a half months of FY19, statistics show that almost all liquidity in the banking system is generated through an increase in the Net Domestic Assets (NDA) as the Net Foreign Assets (NFA) continued to contract. Besides the increase in budgetary borrowings from SBP, relatively higher credit flows to the private sector have been the major contributors to an increase in NDA. Despite contractionary monetary conditions, an increase in working capital needs due to capacity additions in the last three years and recent substantial increases in input prices are the main reasons behind relatively higher credit flows to the private sector.

Economic managers need to focus on 1) adoption of a flexible inflation targeting framework will help anchor inflation expectations; 2) improving productivity and competitiveness of exports will have to play a prominent role to reduce the external trade deficit; and 3) the fiscal policy will have to be proactive and play a supportive role to generate conditions for a sustainable growth path.

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