Pakistan has come a long way in a short period: IMF
By AMANULLAH BASHAR
Apr 26 - May 09, 2004
Finance Minister Shaukat Aziz, will be presenting the federal budget 2004-05 in the second half of June the last month of the financial year.
The budget for the next financial year which must be in the making is being presented in a situation when almost all major economic areas have performed exceptionally well during the year. The handsome results may provide comparatively a better space for the budget makers to allocate funds must be suffice to social development program, especially in the areas like education, health and infrastructure development projects aimed at creation of more jobs to combat the alarming poverty level in the country.
The Finance Minister has recently declared that the next budget would be growth and investment-oriented for which the process of consultation with stakeholders has been initiated.
All ministries, chambers of commerce, trade bodies, civil society organizations and other sectors were formally asked to send their proposals.
The budget would focus on poverty reduction, per capita income and investment.
New procedures for sales tax refunds process development and easy clearance from customs would be introduced in the forthcoming budget, the Minister said.
The business community, however, has strongly criticized the long delays in refund claims. The business people are of the view that the high rate of sales tax and a limited tax base induces for tax evasion. The situation could be much improved if the sales tax was reduced to 10 percent instead of ranging from 10 to 23 percent on different areas.
They feel that recovery of the sales tax and than its refund is an exercise which hardly produce revenue of Rs4-5 billion. If the textile exports are exempted from the sales tax the textile sector can add another $2-2.5 billion by utilizing the held up refunds with the CBR.
The trade and industry is pinning hopes with the budget for relief in utilities, tax rates and an investment friendly budget instead of focusing on revenue targeting document. They observe that more investment is the key to generate more revenue as it is the investment which enables the industry to produce more and generate more revenue.
A comparative view of strong economic situation today as against the nightmare of 1999 when the country was at the verge of default, the donor agencies instead of lending a helping hand were reluctant to cooperate in respect of debt servicing — a hanging sword over the sovereign dignity of the country.
Today, the situation is altogether different from what it was 3-4 years ago. The economy over last three years has gained a comfortable position to an extent that the economic managers are considering to get out of the IMF financial regime. Probably, by the end of December 2004 after completion of the PRFG, no more financial assistance would be required from IMF. The faster growing economic situation has also been endorsed by the IMF itself.
Recently, the IMF said it was optimistic that strong growth in Pakistan will continue and reduce poverty. " Pakistan is clearly on the right course" said an IMF statement, through significant gains in the fight against poverty are not yet visible. "Given the authorities' track record over the last few years, we in the IMF are optimistic that strong growth will continue, setting the stage for a reduction poverty."
IMF believed "ultimately, Pakistan's growth outlook will depend on the authorities' ability to continue with sound fiscal and monetary policies and to maintain the momentum of advancing broad-based structural reforms to foster private sector development".
Strengthening implementation capacity will be crucial to improving public service delivery to the poor as well as adequate resources being provided to key social sectors".
The IMF statement referred to the recent endorsement by the IMF Executive Board of Pakistan's Poverty Reduction Strategy Paper (PRSP), as a comprehensive and feasible poverty reduction strategy, and a good framework for further reform after the expiration of the Fund program. The Fund staff appreciates this opportunity to comment on Pakistan's economic developments and outlook".
The IMF has supported Pakistan's economic reform programme with a three-year arrangement under the Poverty Reduction and Growth Facility (PRFG). This program was approved by the IMF Executive Board in December 2001 and it will be completed in December 2004. Since its approval, seven program reviews have been completed successfully. In the light of considerable improvement in economic fundaments during recent years, the IMF statement said "This will be a very important milestone for Pakistan following a long history of financial assistance from the IMF. The authorities should be commended for adhering to their commitments under the PRFG and for the impressive economic achievements."
"Of course, the IMF will continue to work closely with the Pakistani authorities, but in a different mode. As part of our surveillance mandate, we will offer advice on macroeconomic stabilization and reforms, and particularly on how economic growth could be strengthened further over the medium term".
"We will also provide technical assistance in the monetary and fiscal areas, as requested by the Pakistan authorities. In this context, a Financial Sector Assessment Program (FSAP) is currently underway, and the results are expected to be published later this year, the statement said.
About achievement under Reforms Program of 2001-04, the statement said " Pakistan has come a long way in a short period".
"By the late 1990s, Pakistan was facing a very difficult economic situation. Intermittent attempts in the past to carry through adjustment and reform program were too often followed by policy reversals and thus failed to generate positive results. Economic growth averaged an historically low 3 percent in the late 1990s, barely exceeding the population growth rate. For years, the fiscal deficit remained well above 6 percent of GDP. This caused a continuous increase in public sector indebtedness and required a growing share of government resources to be used for interest payments. Eventually, the country experienced a debt crisis. Actually, not only IMF, but other international donor agencies including the World Bank and the Asian Development Bank have acknowledged the strong economic performance of the country and have expressed to extend continued cooperation in future as well. Hopefully, leaders would take lesson of the past and would ensure that the nation would not fall again into the debt trap.
In an overview of the latest economic situation, the Ministry of Finance says that process of strengthening Pakistan's economic fundamentals that began four years ago has further accelerated in the current fiscal year (2003-04).
There are indications that, like last year (2002-03), most of the targets of the key economic areas will be surpassed by significant margins.
The current fiscal year is witnessing unprecedented increase in credit to private sector; accelerating growth in non-food non-oil imports; extra-ordinary growth in industrial production; robust growth in agriculture; higher than targeted increase in tax collection and exports; continuation of low inflation and low interest rate, a buoyant stock market, and above all, an upbeat mood about the economy.
It is generally perceived within and outside the country that Pakistan's economy is now back on the path of higher economic growth it experienced in the 1980's along with macro economic stability.
FUNDAMENTAL GROWTH IN AGRICULTURE
Agriculture sector was targeted to grow by 4.3 percent in 2003-04.
— The water availability has increased by 29% during the current fiscal year
— The fertilizer off-take during Rabi (Season) has increased by 11.0%.
— The wheat crop is sown on an area of 8.2 million hectares against the target of 8.1 million hectares during the current season. The size of the wheat crop is expected to be in the range of 20.3 to 20.5 million tons against the target of 20.0 million tons.
— The cotton production was targeted at 10.5 million bales, however, taking into account arrival at ginneries the production is estimated at 10.3 million bales.
— The sugarcane area and production targets for 2003-04 were set at 1.0 million hectares and 48 million tons, respectively. However, sugarcane crop is sown on 1.1 million hectares and production is estimated at 53.8 million tons — 3.5 percent higher than last year.
— The rice area and production targets were set at 2.23 million hectares and 4.3 million tons, respectively. However, recent information suggests that rice is sown on 2.45 million hectares and the production estimates are at 4.87 million tons- 8.9 percent higher than last year.
Minor crops have also produced encouraging results which offer grounds for optimism that the country will achieve targets in agriculture sector.
LARGE-SCALE MANUFACTURING (LSM)
LSM was targeted to grow by 8.8 percent in 2003-04. During the first eight months (July-February) of the current fiscal year (2003-04), large-scale manufacturing has registered a broad-based growth of 15.0 percent as against 7.7 percent in the comparable period of last year and much higher than targeted growth for the year.
Vegetable ghee (6.8%), cooking oil (22.9%), beverages (18.3%), cigarettes (10.3%) and sugar (20.8%) have performed well in Food, Beverages and Tobacco group.
Cotton cloth (13.7 percent), Leather products (53 percent), Paper Printing and Publishing (8.9%), Cement (14.4%), and basic metal industries (11.9%) have also done well. Most importantly, automobile production has increased by 68 percent in the first nine months of the current fiscal year.
Based on 9 months information, it is safe to suggest that industrial growth will exceed the target by a wide margin.
Based on the information available regarding agriculture and large-scale manufacturing, it is safe to say that the real GDP growth target of 5.3 percent will be surpassed by a fair margin and is expected to be in the range of 5.5-6.0 percent.
Original target for tax collection by the CBR was set at Rs 510 billion for the current fiscal year. During July-March 2003-04, the tax collection stood at Rs. 352.4 billion as against Rs.310.3 billion in the comparable period of last year, which is 13.6% higher than last year.
Target for the first 9 months has been Rs.342 billion while the actual collection has yielded Rs.352.4 billion — Rs.10.4 billion higher than the target.
Direct taxes have increased by 9.2 percent while indirect taxes increased by 15.5 percent. Within indirect taxes, sales tax has increased by 11.9 percent and customs collection is up by 39.0 percent.
It took 5 years to reach from Rs 200 billion to Rs 300 billion but during the last four years we are set to move from Rs 300 billion to cross Rs 500 billion in just 4 years. It is important to note that Rs 100 billion additional tax revenue was collected in 5 years with more than Rs 90 billion of additional tax. It is mainly because of strong economic growth that CBR collected Rs 200 billion additional amount in 4 years without additional tax measures in the budgets.
Inflation was targeted at 4.0 percent for 2003-04. During the first 9 months (July-March) of the current fiscal year, inflation is estimated at 3.7 percent compared with 3.4 percent in the comparable period of last year.
The rising trend in inflation rate witnessed during last five months is because of increase in prices of some basic food items like wheat, wheat flour, beef, mutton, vegetable ghee and onion etc.
Food and non-food inflation have been at 4.6 percent and 3.1 percent respectively during July-March 2003-04 as against 3.3 percent and 3.4 percent of the comparable period of last year respectively.
Appropriate monetary policy accompanied by prudent fiscal management has been responsible for relatively low inflation in Pakistan.
Overall money supply grew by 12.4% during July 01, 2003 to March 27, 2004 as against 12.1% in the same period last year.
Monetary supply is targeted to increase by 11.1% during the Fiscal Year 2003-04. Credit to private sector amounted to Rs.237 billion during the same period which is almost two and half times higher than the corresponding period. The sharp increase in the credit to private sector indicates that the confidence of the private sector has been restored and they are investing in the economy in a big way.
KARACHI STOCK EXCHANGE
KSE 100-Index has moved up from 3433 points on July 1, 2003 to 5582.3 points as on April 16, 2004 — showing an increase of 62.6 percent. The market capitalization increased from Rs.754 billion to Rs.1489.5 billion in the same period which implies an increase of 97.5 percent. In dollar terms, the market capitalization moved from $ 13.0 billion to $ 25.9 billion — thereby, showing an increase of 99.2 percent.
Karachi Stock Exchange (KSE) has been the sixth best performing stock market in the world during 2003.
Exports are targeted to increase by 8.4 percent to $12.1 billion in 2003-04. Exports during July-March 2003-04 registered an increase of 13.3 percent-increasing from $ 7856.0 million to $ 8902.2 million. Exports during the current fiscal year are likely to cross the target this year.
Foreign trade in primary commodities decreased by 1.4 percent. Within primary commodities, exports of rice, fish & fish preparation and fruits, registered a growth of 13.1 percent, 19.8 percent and 21.6 percent respectively.
Exports of textile manufactures grew by 15.4 percent but other manufactures registered an increased of 1.9 percent, the prominent being the petroleum products engineering goods exports which grew by 19.3 percent, and 39.0 percent respectively.
Other exports — basically non-traditional exports — grew by 46.2 percent.
Imports during the same period have increased by 16.3 percent — increasing from $ 9029.8 million to $ 10502.1 million.
Non-food, non-oil imports basically representing the imports of machinery, raw materials and capital goods, increased by 30.0 percent during July-March 2003-04. This clearly indicates the rising levels of domestic economic activity.
Trade deficit stood at $ 1599.9 million in July-March 2003-04 as against $1173.8 million of comparable period of last year.
Current account balance remained in surplus during July-January 2003-04.
With and without official transfers, the current account surplus amounted to $ 1.855 billion and $ 1.422 billion respectively against the whole year target of $ 0.5 billion (or 0.6% of GDP).
Interestingly, the oil bill was 17 percent of the total import bill during 1995-99, it increased to 27 percent in 2002-03 and decreased to 20 percent during July-March 2003-04.
Workers' Remittances during July-March 2003-04 amounted to $ 2875.3 million as against $ 3230.1 million in the comparable period of last year.
Though it shows a decline of 11.0 percent but if we exclude $ 125 million remittances coming through the Hajj Sponsorship Program, the decline is marginal. Furthermore, when viewed against the target of $3.6 billion or $300 million per month, the inflow of remittances is $175 million higher than the target.
FOREIGN EXCHANGE RESERVES
Foreign Exchange Reserves stood at $ 12565 million as on April 15, 2004. It was $ 10729 million at end-June 2003, showing an increase of 17.1 percent from June 2003.
Exchange rate on April 15, 2004 has been Rs 57.5 per US dollar in the inter-bank market while in the open market it was Rs 57.8 per US dollar, showing a premium of Rs 0.3 per $ or 0.5 percent.
Total Foreign Private Investment was $ 820 million in 2002-03 as against $ 474 million a year before. During July-March 2003-04, it stood at $ 586.8 million as against $ 664.7 million in the comparable period of last year.
Direct foreign investment stood at $ 632.3 million during July-March 2003-04 as against $ 658.2 million in the comparable period of last year.
Portfolio investment registered an outflow of $ 45.5 million as against an inflow of only $ 6.5 million. The recent sale of two cell phone licenses are yet to be included in the FDI. It is expected that Pakistan will receive $ 1.0 billion FDI in the current fiscal year against $ 798 million last year.
Pakistan real GDP growth project at 5.8-6 percent during the current financial year is really something which could be investors pulling factor into Pakistan. The investors from the established economies like Singapore.