The State Bank's recently released quarterly report has generally been interpreted as a conveyer of bad news by all and sundry due to the fact that it highlighted some of the increasing risks to the economy. A somewhat contrary view this time has come from an unexpected quarter.
Saying that "negative news sells relatively well compared to positive in the media," Merrill Lynch in its latest country review has tried to deflect the message of the State Bank's report by pointing out some of the bright spots of the economy.
It expects that structural foreign inflows into Pakistan will continue, thanks to a strong domestic economy driven by sustained medium term flows through remittances, and private/public investments. The outlook for services sector remains positive, backed by acceleration in the retail and wholesale trade and better performance by the financial sector and community services. Overall, Merrill Lynch believes the GDP growth rate to be 6.8 percent during 2007-08.
Some of the other developments have also been given a positive spin. The State Bank was quite concerned about the recent fiscal imbalance, but Merrill Lynch asserts that though fiscal indicators seem weaker, they primarily relate to development expenditure that rose by 89.5 percent on year to year basis in Q1 of FY08 and as such highlighted an upside risk to the domestic economy. An increase of 14.4 percent in revenue collection during July-October 2007 indicated the strength of the economy.
So far as the external sector was concerned, Merrill Lynch calculations show a current account deficit of $9.1 billion in 2007-08. Every 10 percent rise in oil prices would add $700 million to the import bill and assuming an average oil price of $75 per barrel for 2007-08 financial year, it will rise by $1.4 billion.
Assuming foreign investment of $5.1 billion, the remaining current account deficit of four billion dollars could be funded through a mix of reserve withdrawals and external debts. Merrill Lynch believes that "Pakistan can easily raise four billion dollars while keeping the external debt-to-GDP ratio consistent at 27.5 percent in 2007-08 (or $44 billion, vs. the current debt level of $40 billion).
This should help it maintain its credit rating of B plus by Standard and Poors and B1 by Moody's International." However, the risk of a pronounced second round of inflation was very much on the cards, given the significant rise in food and oil inflation recently. According to Merrill Lynch, the outcome of elections was likely to prove decisive for the future course of policy framework, as the next government will need to take tough decisions on both the political and economic fronts. Unstable politics may impact the prospects of foreign investment.
The analysis of the economy by Merrill Lynch appears to be based on rather optimistic assumptions and selective indicators, although like any other Pakistani we would also wish it to be true. It has estimated a GDP growth rate of 6.8 percent during 2007-08, which is not very much different from the State Bank's projection of 6.6 - 7 percent but the latest developments put a question mark on this figure.
Due to certain adverse factors, the Cotton Crop Assessment Committee is expected to revise its cotton crop estimate from 14.1 million bales to 11.0 million bales. There has also been a substantial setback to industrial activity in the country due to acute energy shortage and large-scale disturbances after Benazir's assassination. Investor sentiment is highly negative at present due to reasons that need not be recounted here. A strong domestic economy is, of course, a major reason for increased foreign inflows but only under normal circumstances.
Investors are very nervous when there is increased threat of terrorism and bomb blasts. All these adverse factors are expected to dampen the growth rate, exportable surpluses and revenue generation by the government. In the external sector, assumption of oil price at an average level of $75 per barrel seems to be on the low side. Of course, the next government would need to take tough decisions in a number of areas, however, but can anyone be sure that it would be prepared to take such decisions? This question begs an answer particularly when the present caretaker (supposedly non-political) government is shying away from such a course of action and complicating difficulties further.
In our view, the risks to the economy are too apparent to be downplayed and we should be down-to-earth to face the reality of the situation. S&P and Moody's International would not take much time to downgrade our credit rating if the weaknesses of the economy as highlighted by the State Bank are not properly addressed. We don't want to belittle the effort of Merrill Lynch to give an alternative view but their assessment should in no way lead to complacency in the government circles or be given more weight than that of the State Bank.
Comments
Comments are closed.