News Analysis |
The State Bank of Pakistan has issued a report on the performance and state of the economy for the year 2016-17. The economic review claims that economy of Pakistan has continued the accelerating trend and the real GDP growth in FY17 was the highest during the last ten years. Crucially, the growth rate remains over five percent as forecasted by the bank. It expects the growth rate to continue its upward trajectory to stay between five and six percent.
Key Highlights of the Economy
According to a report published on Thursday, some of the highlights are that the fiscal and current account deficit will persist between 5-6% and 4-5% of the GDP.
Debt-financed growth should be shunned, and more prudent and sustainable policies should be adopted to ensure an increase in exports which is a key if Pakistan is to avert the future economic crises
The report revealed that element of consumption in GDP has increased to nearly 94% of the nominal GDP. Though this figure hovered around 90% in last decade or so, but due to a surge in household consumption at 81.8% of GDP, it is pushed to a higher figure.
One of the most shambolic and depressing parts of this report is a decline in the tax collection to 9.5%. It led to decline in the tax to GDP ratio to 12.5% after witnessing the increase to 12.6% by the financial year (FY) 2016. Repeating the trend, the tax to GDP ratio is again significantly lower as compared to 12.9% target set by the bank.
Surge in Expenditure as Election looms?
With the election year looming, the government has significantly increased its expenditures on the development projects. It is apparent as the development expenditure experienced a sharp rise from 7.6% in 2015-16 to 17.3% in the FY2016-17. Therefore, the development expenditure increased by humongous 30.01% during 2016-17. If we compared it with 2015-16, it witnessed the modest growth rate of 16.9%.
In isolation, it depicts a half story which should not be taken lightly. Technically, it should not increase beyond 60%, and it should be addressed aptly to avoid any enormous damage to the economy in future
The report also reflects that development expenditure has flourished as the government is attempting to finish its ongoing projects. The dramatic increase was witnessed in the last quarter when the spending increased by almost Rs 1 trillion.
Agricultural sector subsidy, a major cause of decline in tax collection
In a sectorial analysis, the agriculture sector has played a pivotal role in pushing the real GDP growth in FY17. It mostly got benefited from the tax incentives provided by the government during the last two years along with the supporting industries and private investment. It recorded the growth of 3.5% during the FY17.
Interestingly, the slower growth in tax collection was partly a consequence of tax incentives provided to support exporting industries, agriculture, and investment in the economy. It affected the tax to GDP ratio as the tax collection fell to 9.5%.
Adverse impact of decline in Exports and remittances
The remittances took a significant hit in the FY2016-17. It played a substantial part in widening the current account deficits. It was the first time in FY04 that remittances fell by 3.1% during the FY17. The target for growth in remittances is 20.7% going into FY18 as the growth in the workers’ remittances is expected to recover in the future.
It is argued in the report that since the economy was expanding, it led to the surge in imports and coupled with the plunge in exports and remittance, current account deficit worsened. However, the recent trends regarding foreign direct investment (FDI), remittances and exports are positive but the surge in imports due to CPEC related activities is outstripping and eating up the positive indicators.
Ballooning Debt; a myth or reality?
Though, there has been a lot of concern shown related to the ballooning debt in all the quarters, the figures in the report reflect that debt to GDP ratio has worryingly witnessed a hike. But, it has not taken a sharp trajectory as portrayed in the media. Undoubtedly, debt has swollen up, but debt to GDP is a correct way to look at the debt figure. In isolation, it depicts a half story which should not be taken lightly. Technically, it should not increase beyond 60%, and it should be addressed aptly to avoid any enormous damage to the economy in future.
As suggested by SDPI’s Dr. Vaqar and Sajid Amin, to improve the exports position “the five constraints includes complex domestic and trade taxes regime, overvalued exchange rate, regulatory complexities, higher unit cost of electricity, fuel, and gas in comparison to competitor economies and weak trade facilitation.”
It mostly got benefited from the tax incentives provided by the government during the last two years along with the supporting industries and private investment. It recorded the growth of 3.5% during the FY17
Pakistan must address the issues related to its exports to come out of the current quagmire. Also, there should be some discipline in public spending. The public should even hold on to its spending power. As argued by the Sakib Sherani,
“Not for the first time, the country has indulged in a binge of spending, afforded by borrowed short-term inflows and an overvalued exchange rate, it could ill afford.”
Read more: Pakistan’s economy at a tipping point
Challenges for the future
The failed policy of reliance on import based consumption largely subsidized by the export sector of the country through over-valued exchange rate should be shunned for good to avoid and counter the economic crises in future.
One of the most shambolic and depressing part of this report is a decline in the tax collection to 9.5%. It led to decline in the tax to GDP ratio to 12.5% after witnessing the increase to 12.6%
Going forward as suggested by the report, Pakistan must reduce reliance on unnecessary imports to finance the capital goods and primary raw materials to put the economy on the right path by reducing pressure on current account and fiscal account.
Finally, debt-financed growth should be shunned, and more prudent and sustainable policies should be adopted to ensure an increase in exports which is a key if Pakistan is to avert the future economic crises.