The potential for investment growth

The Chief Economist of the State Bank of Pakistan (SBP), Dr Saeed Ahmed, while addressing a seminar titled "Taking economic recovery to the next level: Role of the private sector" at Pakistan Stock Exchange on Monday stated that "it has been noted that some entities have parked their liquidity in Treasury bonds and Pakistan Investment Bonds. This is disturbing as the corporate sector is looking to benefit from investing in risk-free government securities instead of investing in real economic activities." Dr Ahmed computed the potential investible resources at 3.7 trillion rupees - the sum total of treasury bills and PIBs held by the corporate sector; and added that the current economic environment presents a golden opportunity to the corporate sector to invest in manufacturing given the "shift in policy focus from stabilisation to growth, healthy corporate balance sheets with historic low interest rates and marked improvement in security conditions." Ashraf Wathra, the Governor of SBP, stated at the same venue that "in the context of historically low interest rates, marked improvement in security conditions and energy supplies, and launch of the China-Pakistan Economic Corridor-related initiatives, this is the opportune time to invest in new projects."
However, independent economists would express some reservations with respect to Dr Saeed's and the Governor's analyses. First and foremost, there is no supporting data that indicates that the government has shifted its focus from stabilisation to growth. The emphasis in 2015-16 remains on deficit reduction, as agreed with the International Monetary Fund under the 6.64 billion dollar Extended Fund Facility, and there is evidence to suggest that the government has reduced its budgeted allocation on development by 20 to 25 percent with the objective of meeting its deficit targets and, at the same time, levied higher taxes in a mini-budget announced in December 2015 that may raise revenue but would certainly reduce consumption with obvious negative implications on stocks and manufacturing.
Secondly, and equally disturbingly, the issuance of treasury bonds and PIBs reflects the rising reliance of the government on borrowing from domestic sources which, budget documents suggest, is being used for plugging the deficit as well as for financing the rising current expenditure needs rather than for development purposes that have the capacity to fuel growth. The government's claim that the rise in current expenditure can be attributed to meeting the needs of our defence forces engaged in combating terrorism, a major factor in the poor investment climate in the country, is not borne out by facts as the bulk of the rise in current expenditure is on interest payments on external and internal borrowings. Be that as it may, Dr Saeed makes a valid argument namely that the corporate sector can divert the 3.7 trillion rupees invested in treasury bills and PIBs to investment purposes; however that may well lead to the government relying on issuing bonds with a higher rate of return. It may be recalled that the Eurobonds and the sukuk issuances were at the rate of 8.5 (7.5 percent for five-year maturity) and 6.5 percent - well above the rates prevalent in the international marketplace. Or, in other words, the interest payment bill would rise and may further compromise allocations on development.
He pointed out that more than half the potential for investment lies in the energy sector and one can safely assume that this is indeed the case because of the guaranteed sale of the output as well as a price that has an inbuilt profit element. However, at present, China remains the only investor with a clear vision of the profits that can accrue from investing in this sector and has indicated that it would invest 36 billion dollars in our deficient energy sector. Those private Pakistani companies interested in a joint partnership with Chinese companies have yet to surface and already there are allegations, albeit unjustified at this stage, that nepotism is at play in the award of joint partnerships. However, to date the Chinese investment has been relatively small, according to data released by the Economic Affairs Division, and it is unclear whether actual inflow would begin this fiscal year.
There is no doubt that interest rates are low at present and economic theory dictates that low rates encourage greater borrowing by the private sector. However, there are so many other impediments to private sector activity that this one positive feature has yet to play a role in promoting investment. These negative features include an overvalued rupee (negatively impacting on exports), delay in refunds which is creating liquidity problems for the manufacturing sector, the government's heavy reliance on borrowing that accounts for high rates of risk-free return on its own securities and last but not least the government's continued focus on fiscal stabilisation as opposed to growth.
While undertaking its six-month review, the Institute of Policy Reforms (IPR) also recognised that investment target set by the government will not be met due to cuts in development budget. Access to project finance for the private sector holds the key. Not only is an uptick in project finance this year inadequate, it is also restricted mainly to power sector. IPR has rightly demanded the government re-engineer its tax policy and administration if a quantum growth in tax revenue is to be achieved. This institute also asks the government to undertake structural reforms to break out of cycle of low growth trap and continued dependence on external savings causing external debt to rise. Relying on macroeconomic indicators alone has become the norm in Pakistan instead of undertaking a strong action on much-needed reforms.