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Pakistan Economic “Outlook 2016”

December 22, 2015

Every government during its tenure carries a long list of financial accomplishment, partly it could be true, but large part is often questionable and debatable, unless supported along with strong evidence.

In our scenario, this narrative is bewildering because despite oil bill plummeting that has saved around USD 7 Billion annually and Remittances surging to new highs, which will comfortably surpass USD 19 Billion on annual basis, then why is Pakistan still desperately looking for foreign money and totally dependent on external borrowings? And what is the borrowing and payment strategy?

There is constant pressure on Pakistan’s Fiscal & Monetary policy managers forcing them to take unorthodox measures to meet its given targets, though its principle aim should be reduce cyclical downturn.


IMF is the obvious factor, which is causing severe economic pain to that nation, as it discourages growth related spending that helps to contain deficit. Further, to attain extremely difficult targets, Pakistan’s Central Bank is encouraged to offer cheap liquidity through its open market operations (OMO). It assists banks to purchase high yielding Government Securities, which offers exorbitantly high coupon rate that discourages/hinders private sector lending.

It serves two purposes, as it is a useful strategy to maintain low government borrowing target without breaching the agreed limit, unless more money is borrowed directly and simultaneously helps to remain within the agreed borrowing limit. But there is a hidden cost in this transaction.

Since it encourages banks to divert their funds towards investment in government paper, it also slows down the economic activity. Hence, direct tax collection opportunity gets wasted, which is already lowest in terms of Tax to GDP Ratio.

Circular Debt that roughly annually piles up @ one pct or Rs 270 Billion of GDP that ultimately hits Domestic Debt has become almost impossible task to manage. Producing excess electricity is a big cause of worry because plugging of leakages is unmanageable for years. Hence, excess production of electricity increases risk of inflating circular debt.

Calculation based on current working, if electricity production reaches 20.000 megawatt, it would mean annual Circular Debt could hit Rs 370 Billion unless leakages are well managed and controlled.

Furthermore, external borrowing is another cause of economy misery because since decade, the sole purpose of borrowing is to pay debt on maturity, pay interest installments and to remit profit, instead of spending money to boost economy.

My argument is based in facts that since last 7 1/2 years, the country has so far borrowed nearly USD 53 Billion. Out of which present government’s share of borrowings is slightly above USD 28 Billion on completion of its two and a half year term. In its 5-years term period, previous government borrowed nearly USD 25 Billion.

Our problem is lack of vision in boarder term and firm commitment towards building our nation strong enough to counter domestic and global challenges. It is because we do not have a transparent system. We have inadequate regulation and supervision issues. In simple term we do not have any check or control on our wrongdoings.

Financial wrongdoers are well aware of the regulators weaknesses and know that they will not he held liable for their wrongdoings. Hence, they exploit the weaknesses knowingly because they are well aware that they will not be held responsible for their unethical and immoral acts, which becomes source of encouragement for them.


Therefore, with the ongoing policy/strategy I am not very optimistic about long lasting economic impact in Medium to Long Term (2 years to 10 years period).

CPEC is a 15- year program that should give occasional boost with minor upside bump in our record books. But is unlikely to bring much needed economic respite to the larger segment of the population because it has no direct linkage with industrial and manufacture sector growth.

There is plenty of talk about sizable growth and economic prosperity in coming years. I tend to disagree with the planners because in our economic environment, sizable growth does not matter if we compare it with the common mans basic need, as only chosen few will be/are the real beneficiaries. The larger lots of the society are the sufferers, so it should not matter.

For discussion sake, you dump any amount of money or asset in any economy, the accounting equation will certainly point towards higher growth number.

This is how our economy grew in a past decade or so before taking the dip. The reality is that good part of past growth was the outcome of extremely high inflation number. To some extent growth in service sector also contributed in pushing GDP growth rate higher. Growth in agriculture, manufacturing and industrial sector was extremely disappointing due to unsupportive fiscal and monetary policies.

This is why the income inequality has widened and is a troublesome factor. Food is unaffordable for the poor lot, which is the cause of population’s one-third of the children malnourishment and almost 40 pct of the people living under poverty line. 25 million children are out of school. Country’s housing need has reached nearly 10 million units.


Further, to support my argument, it is the constant drop in bank Advance/Deposit Ratio, which depicts true picture of pathetic economic growth. Economic suffering is due to almost nothing growth in industrial and manufacturing sector.

Here is the 5-year Deposit/Advance data in 2011 it was Rs 5.9 trillion vs Rs 3.5 trillion, 2012 it was Rs 6.68 trillion vs Rs 3.86 trillion, in 2013 it was Rs 4.07 trillion vs Rs 7.53 trillion, in 2014 it was Rs 8.34 trillion vs 4.46 trillion and until November 2015 it was Rs 9.16 trillion vs Rs 4.68 trillion.

Based on above data to maintain 60 pct Advance/Deposit Ratio, as it was in 2011, which is a minimum acceptable standard level for any economy to grow. The yearly shortfall from 2012 until November 2015 is Rs 144 Billion, Rs 400 Billion, Rs 542 Billion and Rs 800 billion respectively. This means by not maintaining Advance/Deposit Ratio 60 pct, Private sector was was deprived of Rs 1.886 Trillion, which is the real cause of pathetic economic growth during all these years. This money found it’s for investment in Government paper along with OMO liquidity injection amount of Rs Rs 1.36 Trillion, which totals to around Rs 3.246 Trillion.

If we take another look and make comparison of Commercial Bank’s Advance/Deposit Ratio with Growth Ratio from 2003 to 2007, during this period Advance/deposit Ratio ranged between 65 pct to 80 pct, whereas average growth ranged nearly 7 pct and investment in government securities was comfortably below Rs One-Trillion.

Furthermore, to my give strength to my argument that why economy will struggle to make a sharp uptick, I would like to add that it is worth nothing that in last seven and half years, country’s total borrowing amounts to USD 52.5 billion and yet the economy is unable to takeoff.

Whereas, Chinese investment plan of injecting USD 45.6 Billion is stretched in two-parts, strategic and infrastructure related projects. I do not want to mix up strategic portion that consists 25 pct of the investments plan, which is almost half way done. I am referring to the other 75 portion of the investment spread in 15-years.

Therefore, based on above facts unless money is pumped for the real purpose, achieving economic number is meaningless, which is nothing more than adjusting entries, unless benefit is passed on to the larger part of the population.

GDP GROWTH = An adverse economic shock can prove fatal if appropriate and timely measures are not taken, because duration of its impact could stretch for longer period of time if the economy is forced into vicious cycle of conflict.

For discussion sake, if we make an assessment of current level of fuel price and electricity price in comparison to oil prices fall in the international market, it will provide a better picture and causes of Economic instability, confirming, uneasiness and lack of confidence in economy.

Based on oil prices fall in last 15-months, our annual oil bill saving is comfortably more than half the bill amount that was paid in Fiscal Year 2013-14.

Similarly, despite recent sharp fall in SBP Discount/Target Rate, bank lending to Private Sector data further confirms intention of seriousness and effort made to stimulate economy. Hence, business community’s grievances of high cost of production and energy shortage is justifiable, which is the major cause of economic slowdown.

Therefore, to bring positive changes our managers have to understand the crux of the problem that they are required to bring administrative & structural reform/changes through its Fiscal and Monetary Policy to sustain growth momentum.

Unless there is a major policy shift to give sharp boost to the economy, it still has the potential to add another 0.5 pct to the GDP by current fiscal year end. However, faster CPEC activity would increase the size of GDP by another 0.5 pct by the end of calendar year. But one factor that should not be ignored is Circular Debt, as Rs 280 Billion is equivalent to 1 pct of the GDP, which is not included in above calculation. This means settlement or reduction of Circular Debt by Rs 280 Billion would push deficit higher by one-percent.

INFLATION/COMMODITY =We have a 50-year History of High Inflation Rate averaging around 8 pct, with highest 37.50 pct hitting on December 1973.

Inflation, which is measured by the Consumer Price Index (CPI) indicator that consists of 481 commodities, is a comforting factor for the policy makers mainly due to easing of commodity prices. In 12-months period it fell sharply, getting close to 1pct from 8.6 pct. Fiscal year end close was 4.53 pct.

Artificial measures such us extremely high food support price, which makes domestic commodity prices costlier than international market price did not allow inflation to enter negative territory or else it could have easily touched historical lows.

For the rest of the year, whether condition, global food and energy prices will be the key driving factor that will help to determine inflationary trend in coming months. Rupee parity and government are the other two influencing factors.

However, weaker currencies in Russia, Brazil, Ukraine and South East Asian countries would help their agriculture sector.

Currently effect of El Nino could be the strong, as weather pattern suggests that it could taper down by 2nd Quarter of 2016 unless heating condition stays for longer duration, which could prove good for Sugar and Palm Oil traders. It seems 5-year bear cycle could be over after dipping from 35 Cents to below 12 Cents. This could be boon year for country’s sugar producers, as they are already holding sufficient stocks.

But unless there is potential supply shock, which is a lesser probability, Wheat producers could face tough times due to excess production. While, Russia, Ukraine, Australia and Canada could pose a big challenge due to its weak currencies.

Similarly, though paddy production is expected to contract by nearly 3 million ton due to poor performance in Asia, but this time China and India can sprig surprise unless effected by El Nino factor. With the risk of large crop arrival, Rice prices this year could once again remain subdued.

Bottom line is that our crop policy also plays key role in demand and supply factor, but more importantly friendly support price policy and subsidy to cover faulty policy, which goes against all odds is the spoiler that weakens original target. Hence, ultimately it is one of the major factors that influences inflation trend. Commodity glut is here to stay in 2016, which should not push inflation number sharply higher.

Oil price is another key driver to determine inflation trend. In next 2-quarters, I do not see sharp up move in oil prices, nor I am expecting big surge in last 2-quarter unless there is geo-political unrest.

Therefore, I have every reason to believe that inflation by the end of FY 15-16 should hold around 3 pct and in the remaining two-quarters should stay well below or around 3.5 pct

DEFICIT = Another interesting topic of discussion, which largely depends on quite a few contributing elements. Recent SBP report suggests that it is worried due to excessive bank exposure on government debt and keen for credit expansion. With Finance Minister adamant to contain deficit around 4.3 pct, it surely contradicts SBP’s call.

Circular debt is thorn in the flesh that could spoil the party. Any adjustment would push deficit higher. Rs 280 Billion reduction in Circular debt is equivalent to 1 pct of deficit of GDP. Therefore, I suspect 4.3 is achievable.

PAK RUPEE/USD  @104.90 = I see two to three more FED Rate Hike this year, which will add pressure on emerging and regional market currencies and this will add pressure on PAK RUPEE too. I am expecting Rupee to follow its competing partners and hence, by end of December 2016, Rupee is likely to weaken between 5-8 pct.

REMITTANCES = Despite lower oil prices, I do not see not any disruption in inflow, so remittance could get close to USD 20 Billion by the end of Calendar year end on 12-months basis.

SBP TARGET RATE = 100-150 basis point cut by the end of December.

PIB YIELD = Downward adjustment of another 150-200 Basis Point.

PIB COUPON RATE = Downward adjustment of another 150-250 Basis Point.

Deficit Financing = Rs 1.4 Trillion

OPEN MARKET OPERATION (OMO) = Rs 1.5 Trillion Plus in 2016.

ADVANCE/DEPOSIT RATIO = Risk of fall below 50 pct.

REVENUE COLLECTION = Shortfall by Rs 200-300 Billion.

CIRCULAR DEBT = Annual Growth could get close to Rs 300 Billion

EXPORTS = It is one of the most disappointing economic contributor, as the industry always carry a very long list of demand such as substantial weakening of Rupee, lowing of refinancing rate, subsidies, tax rebates and import taxes.

In last 6-years our exports has been hovering around USD 25 Billion and struggled to make further gains. The real truth is that gains in past 3-5 year period until 2008 was not because of prudent export policies or impact of modernization, it was because of sharp surge in global commodity price due to QE and zero FED interest policy.

Hence, availability of cheap liquidity gave ample of room to hedge fund and investors to speculators. At that time Chinese economy too was enjoying its peak boom period of its 2-decades of double digit growth. Its industrial output was annually growing at 22 pct that has halved. Then China was accounting almost 40-50 pct of the total global demand.

During this commodity boom era of 2000, Pakistan’s export figure too flourished, but our export sufferings soon started after the 2008 sharp global slowdown, due to complacent behavior. Pakistan’s export growth was not genuinely growing at the required pace in terms of volume. It was due sharp hike in global commodity price, which was the actual cause of higher receivable.

Our economic managers are making false claim that recent fall is caused by slow global demand. In 2010 Pakistan nearly produced 6.4 million metric tons of rice and in 2015 is likely to produce less than 7 million metric tons. In 5-years this is 8 pct jump, whereas population growth during this period is 11 pct. The problem is that our average yield of rice is 45-50 kg per acre against India’s 72 kg per acre. In 2010 Pakistan’s wheat production was 24.2 million ton and in 2015 target 26.3 million tons was missed. Our sugar industry is the blue eyed boys. They have recently been blessed with Rs 13 per kg or Rs 6.5 billion subsidy. In 2007, country’s production was 4.74 million ton, in 2103, production was 5.57 million tons and this we struggled to attain 4.77 million ton target. Our average yield varies between 45-50 million tons against global average of 60 million tons. Another area of extreme concern is fall in cotton consumption to below 9 million bales from last year’s 14 million bales.

Above details is to provide better sense of seriousness of policy makers. There is surely imperative need to boost our exports. Our exporters should understand that there is dire need to diversify the export basket and seriously consider changing the destination after failing to re-enter its old market.

They have to accept the fact that there is a big shift in global consumption pattern and so in demand for goods and services. Instead of begging for concessions all the time and threatening to stage protest, our exporters have to seriously consider of bringing a change in their business strategy.

Therefore, without shift in overall policy stance country’s USD 25 billion export would continue to hover 10 pct (plus or minus).


(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transactions)


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