Pakistan's economy, after experiencing severe economic shocks in the last couple of years, is now striving for recovery with expected GDP growth of 3.3 percent for FY10, analysts said. The Budget FY10 seeks to address the irregularities, particularly removing subsidies and enlarging tax net by rationalising the tax burden on earning component of the economy.
Enhancing tax-to-GDP ratio would require more focus on expanding the tax base as major subsectors of the economy are lying undocumented, the Invest Capital Securities research report, issued here on Tuesday, said. The report said that on the external front, Pakistan's risk perception has also come down as indicated by a considerable decline in the country's Eurobond yield by 17pps (touched 26 percent in Dec-09).
Total tax collection of Rs 454 billion for five months of FY10, though posting 6 percent year-on-year growth, remained 3 percent short of the target set by the government. Considering the slow economic recovery for corporate sector, which has the largest share in tax collection, total tax collection target of Rs 1.3 trillion seems challenging for FY10, the report said.
As per IMF plan, the government is expected to enforce VAT system from FY10. The efforts to address the issues spurred whether concerning the legislative side or the operational element. However, implementation would remain a challenging part, considering the clubbing of different tax areas into single tax units.
Budget FY10 was focused on investment with significant 55 percent increase in development spending. However, it has been highlighted time and again that the dependency on external resources (22 percent of total resources, up 39 percent on yearly basis in FY10), with persistent delays in materialisation of the funds, would result in downward adjustment in the development expenditures for FY10.
Considering the expected improvement in inflows from external sources in the last half of FY10, constraints for deficit financing would ease to some extent. These inflows would also help in continuing budgetary allocation in priority areas, particularly in the energy and social sectors.
So far so good. The country's remittances have shown a massive surge of 24 percent on yearly basis during the first half of FY10 to $4.53 billion. In the wake of slowdown in FDI in the country ($1.01 billion, down 57 percent in the first half of FY10) and decline in total exports, remittances have played a vital role in supporting the external account of the country. Total inflow through this category is expected to fetch $9 billion in FY10. The rising external debt repayments of the country have been partly offset by increased remittances flow during the last 2-3 years.
Agriculture, industrial sector, to lead growth path current statistics for major crops suggests encouraging scenario as production is expected to surpass the local consumption requirements. This would subsequently support the exports of agricultural and value-added products later this year. However, water shortfall and imbalance use of fertilisers due to price factor stand as major risks to the fertility of the soil.
On the back of better agri-production, value-added sectors, primarily textiles are also expected to compensate the earlier production drought that followed lower export demand and power crises. Although the concern of external account lies with diminishing exports (declined by 11 percent in five months of FY10), gradual improvement in textile is encouraging as it contributes 60 percent of the country's total exports. It implies the importance and urgency for dealing with power and law & order issues. Improving industrial growth would not only generate employment opportunities and reduce poverty but also would support fiscal and current account position. As per latest updates from FBS, LSM has posted 0.67 percent growth in the four months of FY09 against the 8.2 percent decline in production during FY09.
"We expect the current power crisis to fractionally subside with upcoming power capacities of 2,060MW in FY10 whereas prevalent demand-supply gap of 2,500MW is expected to widen as revival in industrial production cannot be attained without increase in energy supplies", the report said.
The inflationary statistics for the first half of FY09 depicted significant improvement as CPI for Dec-09 settled at 10.52 percent, compared to 23.3 percent in corresponding period. Incorporating the electric/gas tariff hikes and uncertainties on oil prices, CPI is expected to settle at an annual average at 12 percent for FY10 compared to 20 percent observed last year. Better crop production against the local consumption suggests excess supply of major crops would keep local food inflation in check.
The report said that on-going administrative measures of the government with higher prices offered domestically (higher support prices) will rule out the artificial price surge at domestic front, despite lower agriculture production in neighbouring countries ie India and Afghanistan.
"Uncertainty of oil prices in international market, however, remains the major risk to our assumptions wherein upward shift would directly impact domestic prices", it added. Somewhat improved economic conditions and easing inflationary pressure the central bank (SBP) has adjusted the policy rate by 150bps in the first half of FY10.
This development spurred private credit offtake in November-December 09 period reaching 3.76 percent till January 2, 10, which remained in the negative zone till Oct-09. "Although any further rate cut is not expected in the third quarter of FY10, we see 100-150bps downward adjustment in the policy rate in Apr-Dec10 period", the report said.
As liquidity remains the major factor in driving the secondary market yields, expected materialisation of foreign inflows would help ease liquidity constraints in later part of CY10. The improving liquidity position will not only result in abating credit risk in the economy amid lowering secondary market yields but also will subsequently shift banking preferences from investment to credit. Assuming lower targets for the government borrowing from commercial banks, an indication for materialisation of foreign inflows in next quarter would mitigate crowding out risk, the report said.
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