As 2016 draws to a close, and Pakistan completes one half of its fiscal year, it is a good idea to look back and see how things are shaping up. Growth in the last fiscal year, which ended in June 2016, was the highest in five years, though not spectacular at 4.7 percent. Other macro indicators did similarly well, with inflation falling to just below 3 percent and the current account deficit to 1.2 percent of GDP. An earlier article by me assessed reforms (or otherwise), underlining the growth figures, and did not find much to cheer about in terms of structural change. But potentially short-term trends such as the continued stagnation of oil prices, the boom in remittances and the stability of the exchange rate have helped bolster the headline figures.
The government was optimistic for the current fiscal year (FY2017), expecting GDP growth to increase to 5.7 percent, and the fiscal deficit to fall to 3.8 percent of GDP from 4.6 percent in the last year. Inflation is expected to increase slightly to 6 percent. The government was quite clear that growth targets in particular were predicated on improved performance in the commodity-producing sectors, with both agriculture and industry expected to do significantly better than they did last year, and between them, also help bolster exports beyond the dismal $22 billion posted last year. So has any progress been made to help achieve targets?
The one obvious success of the last few months is the improvement in power supply in general and supplies to the manufacturing sector in particular. This improvement has come about from better capacity utilization in the generating units, which has in turn been brought about by improved supply chain management. If CPEC investments proceed as planned, substantial generation capacity will be added by 2018, which should further ease the situation. The State Bank’s data for the first quarter of the current fiscal year (July to October 2016) does not show any significant increase in industrial production, with both yarn and textiles putting up a poor performance compared to their numbers the same period last year. One reason why industry is not responding as positively as expected could be the recent political upheavals the government has faced in the shape of Panamagate and rumors of ongoing tension with the military high command. The business sector’s discomfort with some newly instituted tax measures was another dampener on business sentiment.
To the extent that the business community is uncomfortable with increased scrutiny and documentation, the lack of enthusiasm in business sentiment should be ignored in the short to medium terms. But it is now all the more imperative for the government to pursue a transparent regulatory policy for the economy as a whole and manufacturing in particular, and to establish consistency. Serious investors like to take a long-term view, and have to be assured that the government will not give in to pressure or be derailed by public sentiment. The next quarter should give a clearer picture of whether the sector has indeed been responding.
Other areas of the economy did not show noticeable improvement in the first five months of the current fiscal year, if we go by State Bank estimates (available on its website). The value of agricultural production was expected to register a small increase compared to that of last year, but this is being attributed to an increase in value added in the livestock sector compared to crop production. People who follow data closely tend to view these adjustments somewhat warily as growth in the livestock sector is typically made to compensate for low crop production.
Exports posted at $8.7 billion for the period from July to November 2016, compared to $8.8 billion for the same period last year. Imports increased to $17 billion compared to $16 billion, but key increases occurred in the import of fuel, base metals and machinery and mechanical appliances which points to increased activity in manufacturing and power generation. Remittances posted at $7.8 billion, compared to just over $8 billion for the same period last year. Net borrowing on the capital account was almost double that of last year’s. Direct investment in Pakistan came to $460 million compared to $839 million for the same period last year, but with CPEC investments now beginning to come online, this may change in the remaining six months of the current fiscal year. In one positive development, scheduled bank credit to the non-government sector topped Rs5 billion in November 2016, compared to Rs4.4 billion for the same month a year ago.
Overall, it has been a year of mixed trends so far. The key sectors to watch are the commodity-producing ones. Crop production does not seem to be recovering too well, and industrial production has been less than stellar in the first quarter, but there are signs (mainly the kind of imports that are coming into the country) that it may show some improvement. Exports seem to be in the dumps and investment flows have not yet shown the expected increases, but again, the latter situation could change when CPEC picks up. As of now, there doesn’t seem to be much to celebrate, but let’s see how the year progresses.
The writer is a Research Fellow at Strategic and Economic Policy Research, Islamabad