Economic growth in Pakistan has historically remained volatile, lacking a steady growth path and adding to the economic uncertainty about the country's economic conditions. Historical data suggests that the economy reached a high of above 10 percent growth level in 1954, but the following year it declined to 2 percent and went up again to above 9 percent in 1969 and 1970. Then it dipped again to 1.2 percent in the following year. Likewise, it reached 7.5 percent in 2004-05 but slowed down to 5.6 percent next year and further dropped to 5.5 percent in 200607. From 2007-08 to 2012-13 the economy grew by 3.2 percent on an average.
When the present government came into power in 2013 it particularly focused on the revival of the economy and within a short period of time it achieved considerable gains in restoring economic stability. After taking measures to restore macroeconomic stability, the government focused on higher GDP growth that brings better living conditions to the people through higher increases in per capita incomes, more job opportunities etc. Since 2013-14, the economy has witnessed a smooth upward trend in growth rate. Real GDP growth was above four percent in 2013-14 and has smoothly increased during the last four years to reach 5.28 percent in 2016-17, which is the highest in 10 years.
It is widely acknowledged that Pakistan has immense economic potential. According to a report published by Price Water House Coopers in 2017, Pakistan is projected to become the world's 20th largest economy by 2030 and 16th largest by 2050. Several other reputed international publications such as Bloomberg, Economist etc, have also acknowledged the impressive economic gains of Pakistan in the last four years. The accommodative monetary policy stance, increase in development spending, substantial growth in private sector credit, inspired activities in the power sector, friendly and pro-growth policies for real sector growth, such as relief measures and in particular for the agriculture sector, were instrumental in achieving this impressive growth performance.
The outgoing fiscal year has witnessed an impressive growth in agriculture output and in the services sector. The agriculture sector met its growth target of 3.5 percent, helped by government supportive policies and by increased agriculture credit disbursements. During 2015-16, the agriculture credit disbursement was close to Rs 600 billion while during 2016-17, the target was raised to Rs 700 billion. During July-March 2016-17, the disbursement was observed to be 23 percent higher as compared to the previous year. These developments, along with the Prime Minister's Agriculture Kissan Package together with other relief measures have started yielding positive results.
The large-scale manufacturing output is primarily based on Quantum Index Manufacturing (QIM) data, which show an increase by 5.06 percent from July 2016 to March 2017. Major contributors to this growth are sugar (29.33 percent), cement (7.19 percent), tractors (72.9 percent), trucks (39.31 percent) and buses (19.71 percent). High growth of sugar is based on production of 73.9 million tons of sugarcane as compared to 65.5 million tons last year, which represents an increase by 12.4 percent.
Large Scale Manufacturing growth has picked up momentum and posted a strong 10.5 percent growth in the month of March 2017 compared to 7.6 percent in March 2016. The YoY growth augurs well for further improvement in growth during the period under review. On average, the LSM growth stood at 5.06 percent during July-March FY 2017 compared to 4.6 percent in the same period last year. The sectors recording positive growth during Jul- Mar FY 2017 are textile 0.78 percent, food and beverages 9.65 percent, pharmaceuticals 8.74 percent, non-metallic minerals 7.11 percent, cement 7.19 percent, automobiles 11.31 percent, iron & steel 16.58 percent, fertiliser 1.32 percent, electronics 15.24 percent, paper & board 5.08 percent, engineering products 2.37 percent, and rubber products 0.04 percent.
Pakistan is bestowed with all kinds of resources which also include minerals. Pakistan possesses many industrial rocks, metallic and non- metallic, which have not yet been evaluated. In the wake of the 18th Amendment, provinces enjoy great freedom to explore and exploit the natural resources located in their authority, with the result that they are currently undertaking a number of projects using their own resources, or in collaboration with the federal government or with donors to tap and develop these resources.
The services sector recorded a growth of 5.98 percent and surpassed its target which was set at 5.70 percent. Wholesale and retail trade sector grew at a rate of 6.82 percent. The growth in this sector is bolstered by the output in the agriculture and manufacturing sectors. The share of Agriculture, Manufacturing and Imports in Wholesale and Retail Trade growth is 18 percent, 54 percent and 15 percent respectively. The Transport, Storage and Communication sector grew at a rate of 3.94 percent. Finance and insurance activities show an overall increase of 10.77 percent, mainly because of rapid expansion of deposit formation (15 percent) and demand for loans (11 percent).
General government services grew by 6.91 percent, mainly driven by the increase in real wages and salaries in this sector. Also other private services contributed significantly.
The observed acceleration of economic growth was bolstered by growth-oriented policies and strategies during the last four years such as the National Power Policy, Kissan Package, Automotive Policy, Textile Policy, Strategic Trade Policy Framework (STPF) 2015-18, the Domestic Resource Mobilization Strategy, improvement in the Ease of Doing Business, and the National Financial Inclusion Strategy.
The Automotive Policy has attracted new entrants such as Hyundai, Renault and Nissan. The policy interest rate, which is the lowest in a decades and stood at 5.75 percent, was particularly helpful for private sector credit expansion. The Credit to Private Sector (CPS) witnessed growth of 65.0 percent during July- 05th May, FY 2017. This credit expansion is instrumental in bolstering further productivity growth in the manufacturing sector. A welcome development is the increasing trend in fixed investment expenditures, particularly in manufacturing, textile, cement, food, electricity generation and other sectors. A sustained growth in credit for fixed investment bodes well for a future increase in Pakistan's overall intensity to invest.
The capital market reaching historically high levels (the stock market index rose above the 52,0 mark in April 2017) is another sign of investor's interest in Pakistan's economy. Revival of investor's confidence and the inclusion in the Emerging Markets Index by Morgan Stanley Capital International has empowered the Pakistan Stock Exchange to outperform its regional peers over the last four years.
Overall fiscal deficit contracted by an annual reduction of over 1 percent of GDP owing to higher revenue receipts, rationalization of subsidies, and stringent control on current expenditure. Due to prudent expenditure management, the budget deficit was successfully brought down to 4.6 percent in FY2016 from 8.2 percent in FY2013.During the current year, the deficit is expected to remain on the downward trajectory observed over the recent years, despite several growth-stimulating relief measures that have been provided by the government such as tax incentives to the agriculture sector through sales tax exemption on pesticide and fertilisers Similarly, five major exports-oriented sectors (textile, leather, surgical and sports goods and carpets) were allowed zero rating facility. In addition, petroleum prices were subsidized to provide relief to consumers Moreover, customs duties on the import of raw cotton, staple, nylon and acrylic fibers were exempted and sales tax exemption was allowed on the import of new textile machinery.
The pace of revenue mobilization has witnessed an upward trajectory since FY2013. Overall revenues increased to 15.3 percent of GDP in FY2016, compared to 13.3 percent of GDP recorded in FY2013. Among those, tax revenues increased from 9.8 percent of GDP in FY2013 to 12.6 percent of GDP in FY2016.
FBR tax revenues recorded a significant increase since FY2013 and gradually grew by 60 percent in FY2016 over FY2013. Surpassing the annual target for the first time in seven years, FBR revenues posted a growth of over 20 percent during FY2016. In percentage of GDP, FBR tax collections increased from 8.7 percent in FY2013 to 10.7 percent of GDP in FY2016. During July-April FY 2017, FBR tax collection posted a growth of 8.0 percent.
The overall performance of the banking sector remained robust during the last couple of years. The alignment of the regulatory capital requirements in Pakistan with best international practices coupled with high profitability has helped achieving strong solvency. The Capital Adequacy Ratio (CAR) of 16.2 percent as of end December 2016 is much stronger and higher than the minimum required level of 10.65 percent.
Financial sector reforms have improved the access to finance, especially for small and medium enterprises through implementation of the National Financial Inclusion Strategy and legislative measures. The government has considered the financial inclusion strategy as a key policy agenda for inclusive economic development. In order to achieve NFIS objectives / goals relating to Digital Payments, Credit for Microfinance and SME Risk Sharing, the government has approved a PSDP funded projects for an amounted US $137 million to be implemented in five years with World Bank assistance.
The government's efforts to improve Pakistan's business climate to attract higher investment inflows have been underpinned by the National Doing Business Reform Strategy. It outlines key reform measures under each of the ten Doing of Business (DB) indicators, which include regulatory changes and improving technology allowing agencies to increase the speed and to simplify the procedures involved in making businesses operational. The reforms have been designed to effectively address critical bottlenecks faced by small and medium businesses during all stages of its life cycle. Because of the successful implementation of key short term reform measures, Pakistan's ranking in the World Bank's Ease of Doing Business index has improved by four points to 144 out of 190 economies in the Doing Business Report 2017 and the country has been recognised as one of the top ten reformers globally in the area of business regulation.
Necessary amendments in the FRDL Act have been incorporated to provide better operational guidance for fiscal policymaking and safeguarding debt sustainability. The government has updated its Medium Term Debt Management Strategy (MTDS) 2015/162018/19 to ensure that both the level and rate of growth in public debt is fundamentally sustainable and can be serviced under different circumstances while meeting cost and risks objectives. In line with the previous MTDS, the guiding principle remains lengthening of the maturity profile of domestic debt and mobilization of sufficient external inflows in the medium term while making appropriate tradeoffs between the cost and risks.
The cost of domestic debt reduced to single digit, while the cost of the external debt contracted by the present government is not only economical but is also mainly based on long term funding. The government has put special focus on the social sector as well. The performance of the social sector during the current year remains impressive. The government aimed to reduce income inequality to attenuate the degree of poverty by allocating a significant allocation of budgetary resources to implement various social safety net measures. The Benazir Income Support Program (BISP) is the most prominent program to supplement the incomes of the poorest segments of the population. It has been used by the present government to reach out to the most deserving people of the country. The number of beneficiaries has increased from 3.7 million in FY 2013 to 5.4 million at the end of March 2017. BISP's annual disbursement increased from Rs 42.9 billion in FY2013 to Rs 115 billion in FY2017. The quarterly cash grant has also been gradually enhanced by the present government from Rs 3000/- per family in FY 2013 to Rs 4834/- in FY 2017.
In addition, other programs such as the Pakistan Bait-ul-Mal (PBM), Pakistan Poverty Alleviation Fund and Zakat are playing an important role in poverty alleviation. Also the Employees Old Age Benefits (EOBI) provides monetary benefits to the old age workers. In addition, Micro Finance Initiatives help the poor in building their income generating capacities through the provision of better social services such as health and education, food security and access to basic necessities of life.
The Government of Pakistan is cognisant to increase the flows of resources to the education sector by ensuring proper and timely utilisation of funds to achieve the target of 4.0 percent of GDP by 2018. The provincial governments are also spending sizeable amounts of their Annual Development Plans (ADPs) on education to achieve the target. Public Expenditure on Education as percentage of GDP is estimated at 2.3 percent in FY 2016 as compared to 2.2 percent of GDP in FY2015.
Various health priority programs with special focus on the major public health problems of the country have been carried out. These include Cancer Treatment, Aids Prevention and Malaria Control Programs. Recently the Federal Government initiated several programs like the Prime Minister Health Program, Expansion of Immunization Program and continued strong focus on polio eradication across the country to meet the needs of health care and keep the people healthy.
The present government has given importance to assess the demographic situation and the long awaited 6th National Population and Housing Census 2017 is under way in Pakistan. The census data will be helpful for government, researchers and planners to enhance critical evidence-based decision making, planning and strategies for demographic policies. The census will provide reliable data on population, its growth and migration trends in different regions/areas, employment, urban-rural population, male-female ratio, Afghan refugees etc. The national population census is also important for the resource allocation formula under the National Finance Commission (NFC) Award.
Sustainable Development Goals are a universal set of goals, targets and indicators that all UN member states are expected to use to frame their development agendas and socio-economic policies during 2015-2030. Sustainable Development Goals are much broader in scope than outgoing MDGs. One of the strengths of the SDG framework is its recognition of the direct linkages among human well-being, economic development and healthy environment. The government has also launched the Sustainable Development Goals (SDGs) adopted by the United Nations General Assembly which has focused on social, environmental and economic development. The parliament has become the first entity to adopt the SDGs, and has established exclusive SDG centers in the National Assembly. The government has shown its commitment by setting up SDG units with its own resources in Federal and Punjab while the process of establishing units in other provinces is under process for the achievement of its goals.
Pakistan is one of the low forest covered countries with only 5 percent of land area under forest and tree cover whereas the international requirement is 25 percent. To increase the forest coverage the government has launched, the Green Pakistan Program with the main objective to facilitate transition towards an environmentally resilient Pakistan by mainstreaming notions for adapting and enabling environmental policies. The objectives of the program will be achieved by implementing different initiatives and projects.
Notwithstanding these reasonable gains on the economic and social front in the outgoing fiscal year, there remained some areas where results did not improve such as in the balance of payments and in the export-import balance in particular.
Pakistan's exports have been facing headwinds for the past 2 years mostly due to weak global demand and lower commodity prices. The analysis of data on exports shows that for many product categories, Pakistan exported higher quantities, but lower international prices meant that the country was unable to realise adequate FX receipts. However, these negative effects on exports are bottoming out. The recent data released by PBS show that the YoY export growth in April improved to 5.22 percent and MOM by 0.22 percent.
The rise in overall import payments was mainly driven by higher purchases of fuel and capital equipment. This is understandable, given that Pakistan is transitioning from a low growth to higher growth economy, and is therefore faced with supply-side bottlenecks in energy and infrastructure. The Power generating machinery imports increased by 76.5 percent, textile 20.8 percent, construction 66.8 percent, agriculture 35.8 percent, other machinery 53.1 percent, signalling increasing productivity in the industrial sector.
FDI amounted to $1.733 billion during Jul-Apr, FY2017 compared to $1.537 billion during the same period last year, posting a growth of 12.75 percent. On a YoY basis, it registered significant growth of 17.1 percent in April 2017. The major FDI inflows during the period under review are from China ($744.4 million), Netherlands ($478.6 million), France ($171.0 million), Turkey ($137.7 million), US ($103.2 million), U.A.E ($48.4 million), UK ($47.6 million), Italy ($47.4 million), Japan ($42.1 million) and Germany ($40.5 million). Food, Power, Construction, Electronics, Oil & Gas exploration, Financial Business and Communication remained the main recipient sectors Foreign Portfolio Investment (FPI) increased to $589.7 million during Jul-Apr FY2017 compared to $- 404.3 million last year.
Remittances remained lower by 2.79 percent during Jul-Apr, FY2017. However, the recent development activities in the Qatar FIFA World Cup, Dubai Expo, Saudi Arabia's implementation of its Vision 2030 and particularly the recent visit of the PM to Kuwait should all be helpful in opening new avenues for employment in these countries and the Ramazan and Eid festivals will also further support remittances. Going forward one can expect improvements in these FX receipts.
The current account deficit during July-Apr, FY17 reached $7.247 billion (2.38 percent of GDP) as compared to $2.378 billion (0.85 percent of GDP), thus widening by 204.8 percent.
Export of services increased by 0.64 percent during July-April FY2017 of which travel, construction, insurance, telecommunication, computer and information services and other business services sectors showed positive growth. The Financial account balance improved by 68 percent during Jul-Apr, FY2017 and reached $5.428 billion compared to $3.228 billion in the previous year due to the increased FDI inflows by 12.75 percent and positive net Foreign Portfolio Investment receipts. Inflation was contained at 2.86 percent in FY 2016 which is the lowest in 47 years. On average, CPI inflation stood at 4.09 percent during Jul-Apr, FY 2017 against 2.79 percent in the same period of FY2016 due to the increase in aggregate demand and a trend-reversal in global commodity prices. However, YoY it increased by 4.8 percent in April 2017 compared to 4.2 percent in April 2016. But the inflation rate will remain significantly below the target of 6 percent.
Pakistan hosted 13th ECO Summit on 1st March 2017 in Islamabad. The Prime Minister of Pakistan assumed Chairmanship of ECO until the next Summit. Theme of the Summit was "Connectivity for Regional Prosperity" which is in line with the government's priorities of enhancing internal/external connectivity. The ECO Member States agreed to ensure continued and enhanced co-operation in the areas of common interest through effective, timely and result-oriented projects and programs within the organisation. It will undertake actions to achieve the long term sectoral priorities of ECO on development of transport and communication infrastructure, facilitation of trade and investment, effective use of the region's vast energy resources and to consider ways and means to promote ECO's connectivity with other regions in these areas. It underscores the three core principles of ECO vision 2025, ie sustainability, integration and conducive environment, emphasise the need to augment co-operation in the areas of trade, transport and connectivity, energy, tourism, economic growth and productivity and social welfare and environment as identified in vision 2025.
Given these positive developments, the broad- based growth is expected to continue. The country's outlook is brightened and looks promising on the back of agricultural recovery, rebound in industrial activities and inflow of investment under CPEC. The CPEC will not only further develop Pakistan but also strengthen human ties across both sides of the border. Along the CPEC route, new industrial zones should open opportunities for investment, particularly for small and medium sized auxiliary businesses. Joint ventures between Pakistan and Chinese corporations should promote strategic development and mutual assistance. China is rapidly technologically advancing and therefore business collaboration should bring this knowhow on our doorsteps.
The expected transfer of technology can provide a much-needed boost of the development and modernization of the SME sector which is critically required. CPEC is not only a short term economic growth booster, but its impact is far reaching and will trickle down in future. The development of infrastructure, energy and communication will provide much needed impetus to the growth of capital formation, productivity growth and employment.
World economic environment World output has grown by 3.1 percent in 2016 and growth is expected to accelerate to 3.5 percent in 2017 according to the IMF's April 2017 World Economic Outlook. This acceleration is the result of faster growth in the advanced economies (from 1.7 to 2 percent) as well as in the emerging market and developing economies (from 4.1 to 4.5 percent).
Among the Advanced Economies, the United States, United Kingdom and the Euro Area are among Pakistan's most important export markets. Growth in the US is expected to accelerate significantly from 1.6 percent in 2016 to 2.3 percent in 2017. Acceleration is also expected in the UK from 1.8 to 2.0, whereas it is predicted to remain stable in the Euro Area at 1.7 percent. But recent soft data (including business cycle indicators) suggest that in all these areas, including the Euro Area, the business climate is improving.
Among the emerging market and developing economies, the highest growing region is Emerging and Developing Asia where growth is expected to stabilise at 6.4 percent. In this region, China's growth rate would marginally decline from 6.7 percent to 6.6 percent in 2017, India's would rise from 6.8 to 7.2 percent and the ASEAN-5 from 4.9 to 5 percent. Economic growth would also stabilise in emerging and developing Europe at 3 percent in both 2016 and 2017. Growth rates are expected to increase in the Common Wealth of independent states (from 0.3 to 1.7 percent). Similar developments are expected in Latin America and the Caribbean (from -1 to 1.1 percent) and in Sub-Saharan Africa (from 1.4 to 2.6 percent).
On the other hand, economic growth decelerates in the Middle East and North Africa. In Saudi Arabia growth would decline from 1.4 to 0.4 percent driven by lower oil revenues following cuts in production and remaining low oil price levels.
The higher overall world growth prospects will stimulate world trade in the advanced economies, import growth is expected to strengthen from 2.4 percent in 2016 to 4 percent in 2017. An even stronger increase in world import expansion is expected in the emerging markets and developing economies. Pakistan's exports are expected to profit from this favourable development in its export markets.
After the decline in commodity prices in 2016, they are predicted to rebound somewhat in 2017. The average oil price in 2016 was $42.84 per barrel in 2016. Its average price in 2017 is expected to exceed this level considerably. Also, prices of non-fuel commodities are expected to rise this year, after an observed decline in the previous year.
Higher commodity prices coupled with improved growth prospects are helpful to lift inflation rates in both advanced and emerging markets and developing economies. In the advanced economies, inflation is seen to accelerate towards the 2 percent level. This development may contribute to interest rate normalization, especially in the US where the Federal Reserve is expected to increase its short- term interest rate target three times this year.
The current positive mood in business and consumer confidence may well feed itself in the short run, stimulating consumption and investment expenditures, as well as asset prices globally. In that case, global growth acceleration may even turnout to be higher than expected.
But at the same time, considerable downside risks remain in place. The expected uptick in economic growth mainly reflects a continuation of the slow cyclical recovery from the 2008-09 and 2011-12 crises, supported by accommodative monetary policies. The growth rate of potential output remains subdued because of demographic headwinds, especially in advanced economies, and the global slowdown in productivity growth. The considerable decline in the growth rate of total factor productivity, both in advanced and emerging market economies after the 2008-09 crises is believed to be mainly associated with weak investment expenditures.
Against the background of slow potential output growth, large programs of fiscal stimulus, notably in the US, could drive the output gap significantly upwards, followed by monetary tightening and dollar appreciation. Emerging market economies may be adversely affected through capital outflows, higher interest rates and exchange rate volatility.
Potential prospects for disruptions to global trade may increase uncertainty and reduce consumer and investment spending. In the US, authorities have stated their intentions to halt further trade agreements and abolish or renegotiate exiting ones. If these would lead to increased tariff and non-tariff protectionism, the increased import costs may undermine consumer's purchasing power, especially in advanced economies, adding to the risk of global international trade expansion. Trade restrictions may therefore significantly hurt export opportunities in emerging market and developing economies.
Current discussions between the UK and the European Union on their future relations following Brexit, do not seem to have raised excessive uncertainty up till now. But if expectations emerge that the UK would end up leaving the EU without a trade deal, the overall positive economic outlook may be compromised. Also in case no deal can be reached, countries exporting to the UK, including Pakistan may have to renegotiate the bilateral trade agreement which may take a considerable amount of time.
The British Government on March 29, 2017 invoked Article 50 of the EU's Governing Treaty to formally begin the process of leaving the EU. Article 50 gives a member country two years to negotiate terms of its exit, among which issues on trade and immigration. This suggests that for the time being, Pakistan's exports will continue to enjoy duty free export. The Government of Pakistan is looking to win over new friends and revitalize the old friendships in the EU to safeguard Pakistan's interests in the European Parliament and Commission and is also looking for new supporters from within Northern Europe, France and Germany to enjoy the same privileges in the wake of Britain's formal withdrawal from the EU. It will also conduct a round of trade diplomacy with EU member states to strengthen trade relations and augment support in the European Parliament and the European Commission.
In the recent past, global economic uncertainty and volatility were also conditioned by the economic and financial prospects in China. Shifts towards protectionism in the advanced economies may hit the Chinese economy, which is already facing issues in terms of the quantity and quality of debt. Spillovers from turbulence in the Chinese economies to other economies, may be large and fast.
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