Economy of Pakistan with no direction

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Muhammad Arif
Muhammad Arif: Chairman Centre of Advisory Services for Islamic Banking and Finance (CAIF), Former Head of FSCD SBP, Former Head of Research ArifHabib Investments and Member IFSB Task Force for development of Islamic Money Market, Former Member of Access to Justice Fund Supreme Court of Pakistan.

As anticipated  State Bank of Pakistan (SBP) held its main policy rate at 13.25 per cent on 16th September monetary policy decision taking a pause from a series of hikes as expectations have arisen from their angle for a stabilization of inflation rate.

The bank last lifted rates in July by 100 basis points, its ninth cut since the start of 2018, as it faced rising inflation, a substantial current account deficit and downward pressure on the rupee.

The decision comes at a time of scrutiny on the same day i.e. 16th September 2019 when a team arrived from IMF is going to review progress on reforms agreed as part of a bailout package in July.

The International Monetary Fund’s team headed by its Director Jihad Azour has said on arrival that the $6 billion IMF loan program had been structured by the Pakistani government itself and its targets cannot be revised after the lapse of a mere three months.

State Bank has set the target range of 5 – 7% for the inflation over the next twenty four months. But practically it looks difficult as nobody knows what is going to happen by accident like an attack on Aramco Saudi Arabia. Oil prices have thereafter risen and would affect oil prices in Pakistan most probably from October this year.

The Monetary policy committee noted two key developments since its last meeting that influenced its decision.

“First, the interbank foreign exchange market had adjusted relatively well to the introduction of the market-based exchange rate system and current the rupee had strengthened modestly against the US dollar since the last MPC, unlike its previous trend.

“Second, on the external front, the US Fed, as anticipated, reduced its policy rate by 25 basis points (bps), followed by policy rate cuts by other major central banks around the world. This would help in lowering pressures on emerging markets’ currencies and potentially increase financial inflows.”

But apart from SBP and Government, Public is crying for the increase in prices of daily needed goods. As per their experience the prices never go down with the passage of time. The people are least concerned with figures and dynamics of economic policies; they want immediate actions to make their life bearable.

If we look in to the real facts every economist would say that Pakistan is required to pursue reforms to improve its entrepreneurial environment and facilitate private-sector development.. But why this did or does not happen. Current Government with its IMF imported ministers and institutional heads are answering that it is happening due to past governments. But people are aware that in previous governments PKR was better with less reliance on public debt. Inflation was down with GDP growth reaching to 5.8% in 2018 whereas now it is at 3.3%.

Now overall progress lags significantly behind other countries in the region. The tax system is complex and inefficient. Still reliance on indirect tax remains the main feature of tax collection.

Number of active tax payers/filers may reach above 1 million this year. Taxation in Pakistan is a complex system of more than 70 unique taxes administered by at least 37 agencies of the Government of Pakistan with no legislation for Services, Agriculture, Wholesale, Retail sectors to bring them in to tax net.

By going in to data of macro indicators obtained from the SBP one can easily visualize that 2020 is not going to be good for the people of Pakistan in spite of government’s rhetoric’s and its regulators claims.

So what needs to be done? Targeting GDP growth above 6%, with inflation below 6-7%, fiscal and current account deficits ranging around 4% of GDP, tax collection above 15% and public debt around 60-65% of GDP, macro and micro economic policies are required. For that immense structural reforms with lot of legislations are basics for moving forward.

But for that government would have to compromise to bring unity in political and security arenas in the country so as to give some direction to the economy.

Comparison of KEY macro indicators
  FY 2018 FY 2019
GDP growth in % 5.8 3.3
Investment as % of GDP 16.7 15.4
Savings as % of GDP 10.4 10.8
Inflation growth in % YOY 10.5 (Aug 19) 6.2 (Aug 18)
Current account balancs $ in billions -19.8 -13.5
Trade balance$ in billions -31.9 -28.3
FDI as % of GDP 1.1 0.6
Foreign remittances $ in billions 19.9 21.8
Total Revenue Rs in billions 5,228 4,901
Total Expenditure Rs in billions 7,488 8,346
Fiscal deficit in % of GDP -6.5 -8.5
Total External Debt $ in billions (end June) 95.2 106.3
Total Domestic Debt Rs in billions (end June) 16,416 20,730
Credit to Private sector (End June 2019 stock Rs6,666 billion) Change July 18 (Rs -18 Billion) Change July 2019 (Rs -91.3 billion)
Performance OF Stock Market 100 index 41,911 30,245 (Sept 19)
PKR against US$ 120 156
SBP policy rate 7.50 13.25

 

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