Savings - Way forward for stimulating growth

Sajjad Anwar, Director CFA Society Pakistan

TEXT: For the past 18 years, CFA Society Pakistan has been organizing CFA Excellence Awards where different industry professionals and entities are recognized for their work. In this year's CFA awards ceremony, Advisor to Prime Minister on Finance Mr. Shaukat Tareen graced the occasion as the Chief Guest. He also briefed on performance and prospects of the economy; along with the key policy initiatives of the incumbent government that aim to put the economy on a self-sustaining growth path and to achieve macroeconomic stability.

Mr. Tarin painted optimistic economic outlook. GDP growth is expected to range around 5% for FY22 on the back of improving agriculture sector, robust exports growth, buoyancy in Large Scale Manufacturing sector. Revenue collections have also remained robust, as revenues have gone up by 23% this year. However, he mentioned that unfortunately the country is still not self-sufficient in terms of agriculture produce, especially food as we are importing wheat, sugar, palm oil, cotton, etc.

Regarding the status of USD 6 billion Extended Fund Facility (EFF) from the International Monetary Fund (IMF), he categorically rejected the perception that the program impedes our economic output. On the other hand, in line with our expectation, the IMF wants the sustainability of economic growth. GDP growth rate will stay in the range of 5% to 5.2% for FY22. He was of the opinion that GDP growth beyond 6% would be damaging for the economy.

While referring to the performance of the successive government, he said that when the incumbent government came into power in 2018, it inherited an unsustainably large Current Account Deficit (CAD), forcing the government to enter into a ‘though’ front loaded IMF program that resulted in slowdown of our economy. The outbreak of Covid-19 pandemic resulted into a negative economic growth rate.

On the Policy front, the government is pursuing a policy of bottom-up approach that envisages economic package of Rs. 1.3 trillion for 4 million poor households for the next three years. “Our slogan is inclusive and sustainable growth”. To turn this into reality, the government has to grow its revenues as the current 9% tax to GDP ratio is not enough. They want to achieve 5% growth this year and 6% next year.

The government has also launched interest free agriculture loan schemes, and subsidized business loans, housing loans, along with technical training and insurance programs. These loan schemes have achieved great success as in less than a month the government has launched it in KPK, Balochistan, Azad Kashmir, Gilgit-Baltistan, and five cities of Punjab and Sindh. He further elaborated that out of 820,000 loan applications, some 220,000 have met the eligibility criteria.

He highlighted that four million households have been waiting for the trickle-down effects for the last 70 years, but to no avail. Because trickle down reaches at the lowest level if the growth sustains at least for 15 to 20 years consecutively.

While sharing the economic vision of the government, he said that in 1968 Pakistan was the fourth largest economy in Asia, bigger than South Korea, Saudi Arabia, and Thailand. “Our growth rate was impressive, and we were amongst the tigers. Our planning commission was recognized for its excellence, and South Korea actually implemented our five-year plan.”

From the history, he mentioned few factors that led to economic travail: starting with the fall of East Pakistan and the resultant loss of our economic weightage; the nationalization of industry, banks, insurance companies, shipping companies; and the eventual indulgence into Afghan war that costed us loss of hundreds of thousands human lives, and took a huge toll on the economy during this period.

On the Covid-19 front, owing to better handling of the pandemic situation by the government under the visionary leadership of PM Imran Khan through smart lockdowns; and financial support to the agriculture, housing, and export sectors; the economy managed to grow by 3.94% during last year. Turning again to the structural issues facing economy, he said that currently exports stand at 9% of GDP, and imports at 25% of GDP, which is unsustainable.

The remittances that grew by 26% to USD 29 billion during FY21 have rescued us to date, but for how long the country would continue to rely on this. To boost exports, the government is providing incentives to export industry, especially IT. Pakistan’s IT export has the potential to reach USD 15 billion in five years. Energy sector is bleeding as the government will be doling out Rs. 770 billion to the power sector.

The Public Sector Entities (PSEs) are losing around half a trillion rupees, equivalent to 1% GDP, annually. Any efforts by the successive governments to fix them failed due to lack of political will, but Mr. Train expressed his resolve to fix them.

He said that we have to make our financial sector responsive to the needs of economy. In terms of size, financial sector is only 33% of GDP and lending is only 15% of GDP. He further elaborated that 85% of credit is extended in 9 cities, and corporate sector comprises 75% of that disbursement. The financial sector is dysfunctional and we have to fix it. He hoped to achieve the revenue collection of Rs. 6 trillion by the end of this year.

The Advisor said that looking ahead, there are concerns that Current Account Deficit has resurfaced which could damage the economy. But he assured that the numbers are balanced as of now and Net International Reserves (NIRs) of SBP are growing. We will be able to leverage CPEC for our own benefits.

Chinese are outsourcing 85 million jobs to other countries. In order to mitigate the challenges, the country has to increase its savings, as 15% saving to GDP ratio is not enough to support 5 to 6% GDP growth. Exports coverage to imports must also go up to 80% over the next three to four years.

Copyright Business Recorder, 2021