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Facts about Pakistan Economy

February 19, 2017

by Asad Rizvi

There are plenty of theories floating around about Pakistan’s economy is surging ahead and constantly moving forward.

Top Global analysts, journals, newspapers, financial service companies and banks have shown optimism about Pakistan’s economy and are predicting healthy growth mainly relying on CPEC projects (energy and strategic infrastructure). CPEC related Investments are estimated to exceed its original target of USD 46 Billion and are likely to overshoot USD 50 Billion for next 13-years.

And according to PricewaterhouseCoopers, based on projected Global GDP by Purchasing Power Parity (PPP) by 2030, Pakistan will be ranked amongst top 20 powerful economies. This is excellent news, but for better understanding and debate purpose to know the facts its projection needs to be further elaborated.

Some of the classic example of successful economies is Singapore and Hong Kong. Malaysia and South Korea are good name to add.

New Zealand with a total population of 4.6 Million works on free market principles, it has advance agriculture technology and sophisticated farming methods and have a long standing flexible exchange rate. They are now focusing on industrialization. Nordic is another classic model. But in my view, Switzerland world’s affluent economy is certainly the best.

However, it is important to note that I am not associating my article with politics, as my arguments are based on economic facts/realities.

It is true that economy flourishes and growth data surges when ample of money are dumped weather in Cash or Borrowings. Let’s take India as case study.

Its growth history suggests that since 1960 Indian exports were totally dependent on 15-nation Soviet Union (SU), but after 1991 SU collapse its economy was in dismay and was experiencing severe unrest.

While, India got another jolt as two of its major oil suppliers Iraq and Kuwait were engaged in a war that skyrocketed oil prices. Hence its major trading partners were faced with turmoil that almost destroyed its economy. With nearly USD 1.2 Billion Foreign Exchange Reserves in kitty, Indian economy was on verge of collapse.

Then India’s visionary Finance Minister Manmohan Singh was quick to impose industrial custom duty of up to 400 pct, he did not compromise on economic matters of national interest, as there was acute shortage of cash that created “Balance of Payment Crisis”.

He promptly made clever and expeditious strategic moves, as innovative and illustrious economist opted to open Western Trading Gates and today all the hard work and sacrifice paid off. Its major trading partners are USA, China and Europe.

Until 2006, India’s FDI annual growth was averaging USD 4-6 Billion. It currently enjoys hefty foreign inflow and in Fiscal Year 2016, total inflows that include (unincorporated bodies) were USD 55.5 Billion and its growth rate was 7.9 pct. Due to Demonetization, by Fiscal Year end March 2017 it is likely to dip to around 6.5 pct. Current India’s has a foreign exchange reserve is USD 361 Billion.

China is another story of extraordinary growth. It opened its gates for foreign trade and investments after implementing its free market reforms in 1979 and is enjoying the status of world’s fastest growing economy.

The key to rapid growth was emphasis and advancement in technological growth in its domestic industry. China has that has the advantage of large consumer population, started enjoying double digit growth from 1995 onwards for two-decades.

This was only possible after modernizing its infrastructure changes that included transportation, energy and telecommunications by spending over USD 250 Billion by “Y2K”.

Soon after 2008-9 Global crisis Chinese government immediately decided to inject USD 586 Billion economic stimulus package to counter turmoil. Since then it is comfortably averaging annual FDI growth of above 100 Billion and beyond. In 2015 China’s annual average FDI inflow was USD 126.7 Billion, which mildly dipped and in 2016 it inflow averaged around USD 118 Billion.

Since size of Pakistan’s economy during first 50 years was too small, for comparison sake, I am discussing Pakistan’s economic growth of last two decades. Historically against 4.5 pct average growth in 70 years, the economy from 1999 to 2008 averaged robust growth, which was comfortably grew above 6. This was possible due to hefty flow of foreign money, as inflow during this period was of nearly USD 25 Billion.

In 1999, Debt to GDP was around 82 pct that was brought down to 57 pct that surged beyond 60 pct from 2008 onwards. Exports surged from USD 7.8 Billion to USD 19.22 Billion. PSDP surged from Rs 80 Billion to Rs 550 Billion. Fx Reserves from USD 991 Million to USD 16.5 Billion. Ratio of Bank lending against Deposit to Private was above around 80 pct. Poverty rate was reduced to from 35 pct to 25 pct.

In my view some of the Pakistan’s finest statistics is stable Exchange Rate and Inflation. I give credit to Pakistan’s Central Bank for its effective management. Though some of the notable/prominent names argue for sharp depreciation, they have failed to give evidence and in number that the country will benefit from weak Rupee.

Weak Rupee is the cause high price that has made life of common man miserable. These Pundits are quick to point overvalued Rupee as cause of export sufferings, but none of them are writing lengthy articles about the strength of currencies in last 2-months as Indian Rupee recovered by 3 pct, Mexican Peso gained 5 pct, Brazilian Real gained 8 pct, AUD is up by 6 pct, Euro is strong by 2 pct, Russian Ruble made 7 pct recovery, Egyptian Pound made 8 pct recovery and Chinese Yuan is almost at par.

Similarly, Credit Suisse gave a horrible forecast about Pakistan’s economy depicting food supply constrain and since food constitutes 32 pct of the food basket, inflation will skyrocket to 5-5.5 pct by Fiscal Year end forcing SBP to hike rate sharply by 50-75 basis point.

Pakistan’s (June-January) inflation 3.85, which means based on its report Credit Suisse is expecting monthly inflation of above 7.5 pct. I do not see surge beyond 4.5 by fiscal year end.

About rate hike, with sale of Rs 8.045 Trillion worth of Government Securities and with exports down and Revenue Collection a big challenge, I doubt if hike is a strong probability. Instead I still see either hold for longer duration with possible slash of PIB Coupon rate, as there is plenty of room to ease, which will ease governments borrowing cost/burden or else. Debt to GDP will further worsen.

Further, I fully support the strategy of reducing outstanding debt of PIB’s, which helps to reduce borrowing cost. The decline in average tenure of Domestic Debt means increase in the size of T/Bills and availability of liquidity in short term, which will help Central Bank to manage yield cut offs, as large T/bills portfolio held by banks will not allow Commercial Banks to dictate pricing terms or no aggressive bidding, which also means reduction in borrowing cost and hence, decrease of burden for tax payers.

Conclusion

Countries that have large size population, has sizable demand for consumption that also lengthens its trade volume size. But this is not the only growth barometer. For a populous developing country urbanization of population is another key indicator that gives better hint about growing economy. Such economies can only prosper if there is economic development, which is closely linked with urbanization.

In the absence of urbanization policy and urban centers, Pakistan cannot attain high income level as we do not have a single business model that can turn the table. Therefore, without any business model our economic managers should not talk of young large population, as increased population density does not guarantee economic prosperity.

Hence, due to the increased size in population and consumption the size of economy is bound to grow. So there is nothing to cheer about if the size grows to 20th by year 2030 or 16th by year 2050.

CPEC funding will surely keep the wheel of economy moving. I am not sure how many MW will be added to the National grid, but electricity production will definitely increase that will inflate the oil bill too. The crux is the cost factor, as the energy investors based on equity participation will be paid 17 pct rate of return in US Dollars at agreed terms.

The big question that needs to be answered is that what will be size of economic gain in monetary terms?

Will it reduce the ongoing economic duress?

How much will the economy prosper?

Will it help to sharply reduce the poverty level ?

Will the income inequality narrow down?

Will the literacy rate improve?

Will the standard of living get better?

Will the problem of ever rising housing shortfall of 10 million units addressed and reduced or would continue to rise?

Will it help to reduce Debt to GDP Ratio?

Will it help Pakistan’s Tax Collection Ratio make sizable gain against GDP?

Will it help Pakistan’s economy to attain Budget Surplus?

Will Pakistan join as emerging market?

 

Pakistan has plenty of unresolved social issues and corruption is a thorn in the flesh. Poverty, illiteracy, health, water and housing are some of them.

The secret of success for any country is Federalism, Rule of Law, Economic Freedom and Law that Governs the Nation. Modern world is driven by innovation and we are nowhere close to reality.

There is clear global shift in economic balance between developed and emerging economies adding pressure on currencies. The prospect of further FED tightening poses significant risk to the global economies. Instability and Political uncertainty around the region is one of the major causes that hamper growth.

Therefore, I suggest our Economic Leaders and Managers to adopt realistic approach and avoid Economic Complacency and let better sense prevail.

(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 Transaction). 

 

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