HOW LONG WILL THE BONANZA CONTINUE?

MANY OF THE ECONOMIC INDICATORS ARE LIKELY TO WITNESS DETERIORATION AND THE APPREHENSIONS ARE ALSO EXPRESSED BY THE LENDER OF LAST RESORT

SHABBIR H. KAZMI
(feedback@pgeconomist.com)

Oct 22 - 28, 20
12

Lately, the stock market has come under pressure and benchmark KSE-100 index has witnessed some erosion. Experts are of the view that Pakistani stocks fell amid deteriorating working environment that include looming energy crisis affecting performance of textile and fertilizers industries, IPPs facing bleak outlook, stagnant domestic cement demand and falling foreign exchange reserves of the country. Stock prices are likely to come down despite announcement season due to limited interest of foreign investors. Both local and foreign Investors remain concerned over prevailing security unrest in the city. Institutional support was evident in selected blue chip stocks on speculations ahead of earning announcements.

One of the key indicators of dwindling interest of investors has been massive fall in FDI flow and divestment by foreign fund managers. Foreign investment is becoming a rare commodity for the country while the outflow has been increasing rapidly as was witnessed during the first quarter of this fiscal year. The foreign direct investment (FDI) fell by 67% to US$87 million during the July-September period as against $263 million during the same period last year.

The rise in portfolio investment was partly supported the overall Foreign Private Investment (FPI) which fell by 15pc to $183.5 million during the quarter. However, the FDI outflow from almost all sectors except the oil and gas exploration registered significant increase.

The portfolio investment, which is considered a temporary investment, rose to $96 million in July-Sept period compared to an outflow of $47 million during the same period last year. Most of the sectors registered an outflow of foreign investment including the extremely popular telecommunications sector. During the first quarter the sector witnessed an inflow of $78.3 million while the outflow was $179.2m making a net outflow of $100.9 million.

The overall inflow of FDI during the quarter was $286 million while the outflow was $199m giving a dismal picture of the economy having no attraction for the global investors. Analysts said the trust deficit among the foreign investors is increasing as the government makes tall claims but fails to deliver. According to representatives of textiles and clothing industry the poor performance of the economy during the last five years gave a sense that the economic policymakers were lacking bring the country out from the current mess of failures.

Till recently the only attraction for foreign investors was oil and gas exploration sector which managed to attract an investment of $114 million during the first quarter of this fiscal year. This was less than the $180 million the sector received in the same period last year.

The country is facing energy crisis which offers great opportunities to the investors but the sector could not receive any significant investment. In fact, the sector lost almost all investment as the net investment was just meager $0.7 million compared to $14 million received in the same period last year. The country is under enormous pressure of falling foreign exchange reserves and speedy payments of debts and interests on debts to the IMF and other donors. The repayments have slashed the reserves and depreciated Rupee value against dollar.

Lately, the International Monetary Fund (IMF) has expressed serious concerns during the two-day policy level talks on Post Program Monitoring (PPM) of the Stand-By Arrangement (SBA) regarding Pakistan's fiscal framework in the face of growing gap between expenditure and revenue. Ideally, Pakistan's economic managers should have been taking remedial steps at their own rather than others telling them how to manage the affairs.

One of the prime concerns of the IMF is that the fiscal target set by the Government of Pakistan (GoP) at 4.7 per cent is understated as the lender of last resort estimates country's fiscal deficit to grow above 6 per cent. This is based on the premise that the GoP estimates to collect Rs2.381 trillion revenue but the Fund projects collection at Rs2.2 trillion, at the best. Experts believe both the sides may be right based on their assumptions but appropriate steps have to be taken to enhance the overall collection.

One of the concerns is that a significant percentage of collection is coming from rising oil import bill. This may help the government to collect more revenue but the policy can once again push the inflation rate into double digits. Experts have already started concern that the State Bank of Pakistan may not be in a position to further cut the discount rate. In fact some of the experts say in the next policy the central bank may once again raise the discount rate.

The GoP expect to collect higher revenue by offering tax amnesty scheme and increasing oil and gas development levies, whereas the Fund has expressed reservations on the proposed amnesty scheme and also believes that subsidies budgeted would be insufficient to cover the losses in the power sector. However, the team was keen to know how the problem would be tackled.

The Fund has expressed concern over the pace of reforms in the power sector, especially those aimed at strengthening Central Power Purchase Agency's functioning and ensuring autonomy and quality of decision making at National Electric Power Regulatory Authority (Nepra). Pakistanis have been complaining that the autonomy of Nepra and Ogra has been grossly curtailed which does not bode well for the country. In the prevailing scenario not only the local investors are shy in investing in the energy sector but foreign investors are also pulling out their investment.

Local experts apprehend that the incumbent government would indulge in overspending, bringing down tax rates and even paying higher subsidies to attain political mileage this year. These concerns have been supported by the Fund. To be specific IMF has pointed out election-specific expenditure by federal and provincial governments, increased borrowing for deficit financing and reduction in credit space of private sector could lead to serious implication. For IMF even bigger issue is lack of mechanisms to bring the provinces on board regarding any commitment with the Fund, especially after the passage of 18th Constitutional Amendment.