Nov 5 - 11, 2012

The challenge for any government is to maintain economic stability for betterment of lives of its people. With respect to the economic situation of Pakistan, the country is plagued with high prices of fuel, shortage of power and gas along with high inflation, a major cause of concern for the masses. High prices commodities and food stuff is further pushing the middle class below the poverty line. There is no price control mechanism or authority which keeps a tap on unjustified price increases therefore, exponential increases are observed time and again resulting in people reaching the streets to voice their concern. It is said that with a population of 180 million people, an increase in the population automatically creates inflation through demand of food and resources. The government continues to support the budgetary deficits through borrowing from financial institutions which has resulted in crowding out, increasing interest rate and inflation. With recent decline in CNG prices by PKR 30, we can very well observe that the system of overcharging the economy being unjustified where the benefit of the people and the economy is not kept in mind. It is further estimated that OGRA can reduce CNG prices further by PKR 30 since the cost to the Government is PKR 12.5 to PKR 15.

During the period of FY12, GDP was recorded at 4.7 percent. The GDP growth rate is slow and ideally would have expected to be around 6 percent if the economy was not hampered with instability. There is immense potential in the market for long term investments, however, the reduction in the policy rate will show results in the next six months whether advances have increased through reduction in rate. Although theoretically it makes sense to pass a judgment on advances, other factors including cost of inputs, current devaluation, inflation, unfriendly investment environment, terrorism, corruption to name a few will impact all credit decisions. With a poor tax base and imports double of exports, the only major source of funding for the government is borrowing from the private sector, outstanding stock level reaching of Rs. 1,660 billion. The year-on-year growth in the private sector credit was only 4.2 percent.

According to SBP, the reason for decline in private sector credit is electricity and gas shortages, security conditions, and political environment. Under these circumstances banks were discouraged to lend based on the risk involved whereas manufacturing concerns avoided expansion projects. The challenge for SBP with the Monetary Policy is to reduce inflation and encourage private sector lending alongside an attractive rate of return for depositors to counter rise in inflation. The Monetary Policy cannot work in isolation considering external shocks e.g. international oil prices, recessionary impact, devaluation in interest rates or government borrowings. Pakistan is a net importer therefore any devaluation in the exchange rate against the dollar will make imports expensive, put further pressure on the reserves and increase supply side inflation. Though exports due to such devaluation are expected to grow, however considering rise in input cost, such differential may be negated making prices unattractive for the export markets. Decline in interest rate is expected to stimulate the economy and improve GDP through enhance production levels. This will only be achievable if economy provides conducive environment for business growth not hampered through power shortage, gas curtailment, law and order issues along with political environment. Additionally if the government does not stop borrowing form the private sector and increases off take through T-Bill auctions, fresh advances will be slow.

An encouraging sign for the economy are worker remittance which average more than USD 1 billion each month, however FDI has decreased and expected to be less than USD 1 billion at the close of the year keeping with political uncertainty and law and order issues. The country recorded worker remittances of US Dollar 13.2 billion in FY12 as compared to US Dollar 11.2 billion in FY11 seen as a positive sign. It is expected that the inflow of worker remittances will reach USD 15 billion by FY13 through the Pakistan Remittance Initiative (PRI) scheme recently launched. Foreign investors take a strict view on Pakistan keeping into account the country risk, therefore, if domestic investors are hesitant with investments, it is unlikely that foreign investments would flow.

The government's total expenditure to GDP is 19 percent whereas revenue to GDP is 12.5 percent creating a mismatch which needs to be filled through tax base rather than borrowing from the banking sector. Though decisions to maneuver the economy also rests in the hand of the government, what will eventually help resolve the situation is high degree of integrity and accountability for public so that the government is less reliant on the banking sector. If government pulls back on borrowings from the banking system, banks will automatically lend to help maintain the bottom line and profitability. We can only expect that declining interest rates would assist in GDP growth, create employment and give wider access to the public through bank advances.

To encourage the environment of investments and foreign flows in Pakistan, interest would need to be reduced further. Once again, private sector investments will not increase through off-take of credit if the economic environment and macro issues which include political uncertainty, terrorism and law and orders issues are resolved. Even these issues remain in status quo and interest rates are further reduced by 300 bps, we may not witness FDI inflows due to such uncertainties. It is ironic that FDI investments are increasing on a global scale with an incremental rise of USD 1 trillion each year whereas FDI is experiencing a reduction in Pakistan.

The opportunities in Pakistan are vast for Greenfield investments. Pakistan with its strategic geographic location in South Asia can capitalize on trade. Pakistan is an aggregation economy as this sector needs massive investments. Similarly infrastructural developments including roads, dams and bridges need to be revamped. With the ongoing energy crisis, investments are required to be made in power projects which are a basic necessity. If only the petroleum and diesel prices are reduced, the gas used for transportation can be directed towards the industrial sector for gas generated power which would reduce the cost of production and assist the Fertilizer sector with manufacturing of Urea. Investments in Pakistan would therefore depend on a number of factors where the question does not reside in the reduction in interest rate alone. For Pakistan to be self-resilient there needs to be a complete change of mindset to address all macro issues.