Economic growth rate of Pakistan has picked up modestly in 2015-16. However, no visible steps were taken by the government to address structural issues faced by the economy. This has been stated in the annual review of the economy 2015-16 released on Monday by the Institute for Policy Reforms (IPR).
The review recognises that some economic indicators have improved. These include the fiscal deficit, inflation, and the current account deficit. For the first time in many years, Government achieved and exceeded its Federal Board of Revenue (FBR) tax collection target, which grew by 20%. Current expenditure remained within the budget. Low mark-up rates have increased demand for private credit.
According to the review Pakistan has yet to correct the distribution between direct and indirect taxes. Public debt has increased rapidly with some external financing procured at high cost. Pakistan's external sector is weak. Exports have fallen, Foreign Direct Investment (FDI), so far, is low despite Chinese inflows, and flow of workers remittances is modest. However, it could drop or slow down by the effects of energy prices on Middle Eastern economies.
It is feared that all of these factors will nearly double Pakistan's annual foreign exchange needs. Quoting International Monetary Fund (IMF), the review states that in the next four years, current account deficit will remain between minus 1.8% to minus 2.3% of GDP and FDI will remain modest.
Annual external financing needs will grow from US $7.3 Billion in 2015-16 to US $14.4 Billion in 2019-20. Short term debt is expected to grow steeply from 4.2% to 8% of GDP. The review also states that the productive sector of the economy remains sluggish. Production of major crops fell by 6.25%. Higher productivity, the second pillar of growth comes from better infrastructure, upgraded skills, Research and Development and improvement in governance to reduce transaction cost. So far we have not seen a major policy initiative to empower economic players and improve governance. Federal and provincial governments have yet to launch a meaningful programme to invest in the people.
Policy makers have done little to address water availability and its efficient use. In fact, federal allocation for the water sector has declined in the last two years. Industry grew by 3.21%. It is encouraging to see private sector credit increase by 105%. "Half of the additional credit has gone into fixed investment, though the share of manufacturing in new private investment has declined. The economy is still constrained by power shortage and though new investment will increase generation capacity, there is no policy shift to make the total power supply chain efficient," The Review said.
The Review also said that savings and investment remain below the economy's need to grow. Government is expected to make negative savings for the foreseeable future. While development expenditure, due to the construction of CPEC, has increased from the previous year.
The review points out questions on project selection, transparent procurement, and effective project management. The review suggests that to support growth, policy makers must review the political economy. Delay in addressing this issue leads to high government debt and does not allow sufficient public investment. The economy needs an urgent and effective response to the constraining structural issues.