Economy not out of woods yet
 By  Imran Maqbool

Following recent review of the Pakistan’s economy by the International Monetary Fund and the subsequent release of $505 million under the Standby Arrangement.

The federal government boosted about economic performance since it came to power in mid last year.

Government functionaries and like-minded economic analysts are bullish on future outlook of the country’s economic prospects.

And these bullish sentiments were also seen on the capital markets as the Karachi stock market’s key index is trading at record high level as these lines are being written.

But in this euphoria, we are overlooking underlying weaknesses of the economy which, if not addressed through structural reforms, could weigh on future growth prospects.

Today, the Asian Development Bank in its annual economic publication – Asian Development Outlook 2014 – talked about the same dangers.

The report says that achieving fiscal sustainability is a major recurring challenge for policy makers in Pakistan.

“Fiscal discipline has eroded in recent years with the persistent need to finance expanding energy sector subsidies, growing losses incurred by state-owned enterprises, and high.expenditures for security,” it says.

As a result, the report points out that domestic portion of public debt increased sharply for the second year in a row, from 38.0% of GDP at the end of FY2012 to 41.5% in fiscal year 2013, to finance high fiscal deficits.

Foreign debt fell by 4.6% of GDP in FY2013, mainly as IMF debt was repaid.

Total public debt (including external liabilities) at the end of FY2013 amounted to 63.3% of GDP, exceeding the legal limit of 60% set under the Fiscal Responsibility Debt Limitation Act, 2005.

ADB stresses that structural reforms to widen the revenue base are, however, critical for restoring fiscal sustainability.

These include improving tax administration, eliminating exemptions to certain sectors, and bringing all sectors including agriculture under the tax net.

Efforts would be required from federal and provincial governments alike, as some taxes (notably on agriculture) fall under provincial administration and reforms would help enhance their own revenues.

Currently, over 90% of provincial revenues are transfers of federal shared taxes. As provinces have assumed a greater share of federal resources and spending responsibilities through devolution, their fiscal performance has become even more important in relation to the national fiscal outcomes.

For instance, collecting sales tax on services is now a provincial government responsibility, and most social sector responsibilities have been transferred to provinces.

Clearly, the allocation of 57.7% of the national shared tax base to provinces determined under the 2010 National Finance Commission award requires greater fiscal prudence and discipline on the part of the provinces.

A mechanism to ensure provincial fiscal discipline is likely to be a crucial consideration in upcoming discussions for the 2015 award.

Modest Growth

Unlike others, the ADB report is not so bullish over GDP growth prospects. It forecasts GDP growth of only 3.4 percent for the current 2014 fiscal year – lower than what we achieved last year and more importantly below official estimates of 4-4.5 percent.

It says agriculture is expected to be weaker due to a drop in cotton output, which partly oÁset the improvement in sugarcane and rice crops.

Ongoing rains, however, may benefit the upcoming wheat crop, despite a reduction in the sowing area this year.

Weak agriculture will be partly compensated by the pickup in large-scale manufacturing, which grew by 6.7% during the first 6.months of FY2014, three times the rate during the same period a year earlier, the report says.

More importantly, inflation is also not likely to ease substantially this year as well.

The reports says that Average consumer price inflation is projected at 9.0% in fiscal year 2014 and 9.2% in fiscal year 2015.

After going through the ADB report, one can safely assume that not all is good on the economic front.

The government needs to tighten its belt to reduce fiscal deficit, introduce policy initiatives to spur foreign inflows,
restructure tax regime so that the available fiscal space is used to give relief to the masses as providing mere 1.72 per litre relief to the general public on petrol is simply not enough.

April, 2014

Source:  Samaa News