- Jan 04 2016
There’s no news like bad news, and in the last decade and a half, Pakistan has had its fair share of it. This excessive focus on all that has gone wrong with the country has eclipsed the little good that appears have happened to it, especially in the last 2-3 years. For one, a resurgence of sorts in its $230 billion economy, or at least parts of it, has largely been ignored by the mainstream media.
Sample this- since 2011, KSE-100, the benchmark index of the Karachi Stock Exchange (soon to be merged with other exchanges to form Pakistan Stock Exchange), the country’s premier bourse, has trebled from 11,000 levels to around 33,000 levels; the Pakistan Automotive Manufacturer’s Association, an auto industry lobby group, said in November 2015 that it had registered a 62% year-on-year growth in sales; and, between 2014 and 2015, the country’s cement industry grew 57%; Pakistan’s foreign exchange reserves, which in May 2013 were down to just ten weeks worth of imports, are presently at record high levels of $21 billion.
Pakistani business analysts and fund managers this writer spoke to, say that a rise in consumer spending is fuelling a boom in the country’s real estate, cement and automobile sectors. Data shows that between 2001 and 2014, consumer spending in the country went up almost three fold from around Rs. 3,000 billion (PKR) to more than Rs. 8600 billion (PKR).
The latest annual report by the State Bank of Pakistan (SBP), the country’s federal reserve bank says that the policy rate was reduced in four consecutive monetary policy decisions taken between November 2014 and May 2015. On the fiscal side too, government spending in 2014-15 went up by 18.9% as compared to the previous year. “Some impact of the policy stimulus was visible on GDP growth; for instance, government’s infrastructure spending led to buoyancy in construction activity, and increased manufacturing of steel, cement, etc,” the report noted.. “Similarly, the rise in salaries and pensions spurred up growth in general government services. Even the recovery in finance and insurance is also associated with banks’ investment in government papers,” it went on to say.
In fact, as a Bloomberg report noted in July 2015, the real estate boom marks Pakistan’s “emergence as a frontier market” after prime minister Nawaz Sharif “averted a balance-of-payments crisis” with help from the International Monetary Fund (IMF) and “resumed selling stakes in state companies.”
The report further details how the Sharif government is boosting infrastructure spending as the country’s economy expands at its fastest since 2008, with the lowest cost of borrowing in at least over 40 years. This, even as inflation, which had peaked around 25% in 2009, is at sub 5% levels now.
The IMF steps in...
One big factor say analysts for the economic revival is a set of IMF mandated reforms put in place by Sharif after he took office in June 2013. As part of the $ 6.6 billion loan package offered by the IMF, the government was required to offload stakes in at least 16 state owned companies to lower its fiscal deficit and achieve a modicum of macroeconomic stabilisation. The IMF program “envisages a substantial decline in the budget deficit of the government” from nearly 8.5 percent of GDP (Gross Domestic Product) in 2012, to 3.5 percent of GDP by the end of the program.
“To achieve this, the authorities will substantially reduce tax loopholes and exemptions, broaden the tax base, and reduce tax evasion,” the IMF had said in September 2013, while unveiling the 36 month program.
At least one fund manager that this writer spoke to was of the view that some of the tax reforms appear to have worked, forcing a part of the unaccounted wealth and remittances from Pakistanis settled abroad, into the mainstream economy, money which would have otherwise found its way into the ‘parallel economy.’ This has meant that remittances and forex reserves are at record high levels.
Amid much opposition from employees, the Pakistan government is scouting for a strategic partner to divest 26% stake in its loss making flagship carrier Pakistan International Airlines (PIA), even as its efforts to do the same with the almost defunct Pakistan Steel Mills, have been futile so far. The other major company on the block is the Faislabad Electricity Supply Company (Fesco) on whose 75% divestment, the cabinet has so far failed to take a call.
… as do the Pakistan Rangers
Another major reason that experts within Pakistan cite for the growing confidence in the business community is the fact that the authorities have been able to curb the menace of gang war and politically motivated violence in Karachi, the country’s financial capital, ever since Pakistan Rangers, the main paramilitary force (akin to India’s Border Security Force) was set after them in September 2013, exactly around the time the IMF deal was signed.
And, there is some data to support this claim. Figures on reported crimes accessed by this author show that in Karachi, a city known for its incessant gang wars and political strife, while in 2013, 174 cases of kidnapping for ransom were reported, the following year, the figure came down to 115. In fact, till June 2015, only 14 such cases had been reported. Similarly, in the same period, there has been a secular decline in cases of extortion, dacoity, murders, vehicle theft and rapes. In July 2015, a progress report released by the Sindh Rangers had said that they had “conducted 5,795 raids during which they had apprehended 10,353 suspects and recovered 7,312 weapons and 34,8978 rounds of ammunition.”
There’s a long road ahead
However, none of these developments as yet suggest an overarching turnaround in the economy, which was hit hard by the global economic meltdown beginning 2008. While the country’s exports are declining, imports haven’t really ebbed despite the fall in the international price of crude oil since October 2014.
“For example, in textiles, Pakistan’s largest industrial sector and traditionally accounting for approximately 12% of GDP, 67% of exports and 57% of national employment, total exports fell 13.50% during period-on-period July to October 2015 over 2014,” economist Kamal Monnoo notes in this piece for The Nation. “What is worse, the three main competitive product categories, cotton cloth, bed linen and towels, all lost out heavily to competitors like Bangladesh, Sri Lanka, Vietnam and India, losing volume sales by 10%, 9% & 19% respectively – and this in spite of Pakistan enjoying a zero-duty entry tariff with our largest customer, the EU (European Union),” Monnoo goes on to say.
Further, State Bank of Pakistan data shows that in 2014-15 while the real GDP grew by 4.1% (as compared to 3.7% in the previous year), it fell short of the targeted 4.4%, and is still way below the high of 8.96% in 2005-06, when former army chief Gen. Pervez Musharraf was in power.
Moreover, overall bad optics have meant that foreign investors have stayed away. Foreign direct investment in the last five years was highest in 2010-11, when it topped $3billion, but has not touched that mark again. The analysts this writer spoke to also pointed to the fact that the stock market boom has been accompanied by extreme volatility.
The SBP annual report itself says that macro policies can make a meaningful impact only after structural changes in the economy are brought about. “Private investment is the case in point. Despite a sharp reduction in interest rates and an increase in public investments, private investments did not recover. Investors’ confidence demands the presence of a predictable macroeconomic environment with a well-coordinated and consistent long-term industrial and trade policies. Unless this is provided, investors would remain reluctant to put in their capital into the system,” the report says.
China to the rescue?
Pakistan is now banking on its long-term friend China, which has plans of investing $46 billion in the country’s infrastructure sector as part of the so-called China-Pakistan Economic Corridor (CPEC) which would stretch from Gwadar in Balochistan to Kashgar in China’s Xinjiang region. A bulk of this investment- almost $35 billion would be for setting up coal and LNG based power plants.
However as this blog in The Economic Times by former Intelligence Bureau official Tilak Devasher notes, Pakistan’s gains from the investment might be limited- first, because it is unlikely to benefit the provinces of Balochistan and Khyber Pakhtunkhwa; and second because Pakistan and China have in the past had differences in the past on issues related to power tariffs, which has meant that projects have been put on hold.
The author is a reporter based in New Delhi.