KARACHI: The State Bank of Pakistan (SBP) has cautiously predicted that the country will witness a higher growth of GDP in the next financial year (FY) 2015-16 due to stable policies and marked improvement in the macroeconomic indicators for the past two years.
The real GDP grew by 4.24% in the closing financial year, the highest since 2007-08 but it fell short of 5.1% target for the year, as most of the challenges to economic activity continued to persist.
The stability in the exchange rate, together with the government decision to pass on the benefit of fall in the international oil prices to domestic consumers and the prudent monetary management, pushed year-on-year consumer index price (CPI) inflation down to a decade’s low.
The reduction in inflation is broad-based as all measures of core inflation posted noticeable declines during the period of analysis.
As envisaged in the Annual Plan for FY16, with some improvement in agriculture, major contribution is likely to come from the industrial and services sector whereas SBPs policy cut rate to a historic low during the past seven months would support the economic activity.
Further, with the import of liquefied natural gas (LNG), and completion of few energy related projects, energy supply is expected to improve whereas persistently low international oil price would also facilitate energy supplies by reducing the cost of tariff rationalisation and energy related expenses of the businesses.
Construction activity is set to gain from mega infrastructure projects and grow private sector residential projects. Moreover, work on road construction under the China-Pakistan Economic Corridor (CPEC) is likely to gather pace during the next fiscal year. Manufacturing sector would be a major beneficiary as the construction and allied industries are likely to gain from this increasing activity.
Furthermore, the investments are expected to revive because the energy shortage is likely to ease further; as a result of the on-going campaign to eradicate terrorism, law and order has significantly improved; positive assessment of the economy and credit rating agencies, would help improve investors’ confidence; foreign direct investment would gain from inflows under CPEC and historic low interest rates would also support the investment activity.
While the above developments are encouraging, the persistence of structural problems remains a risk to economic outlook. In this context, although the government is pursuing a well-defined reform process (as a part of the IMF programme), there is a need to capitalise on this opportunity by taking tough measures to promote sustainable economic growth.
First, lower tax-to-GDP ratio is a recurring problem. It seems challenging for the Federal Board of Revenue (FBR) to meet the revised target for the year, despite various tax adjustments, and resolving legal challenges for Gas Infrastructure Development Cess (GIDC) collections in the recent months.
Efforts towards documentation of the economy, elimination of tax exemptions, improving governance, minimising leakages in tax collections and strengthening provincial taxation departments along with effective contract enforcement, property rights, accountability and provision of justice are must to improve tax collections.
Secondly, loss making Public Sector Enterprises (PSEs) remain a contingent liability. The privatisation process of these PSEs is yet to produce tangible results. So far, the government has divested its share in profitable financial institutions (UBL, ABL, and HBL) through capital market transactions. None of the divestment with the shift of management control could take place, as privatisation of energy related PSEs is still at its initial stages. Given the fact that profitable entities were the first to be privatised, delay in the privatisation of loss making PSEs, would be a burden on the national exchequer.
Thirdly, despite a marked improvement in the external account, exports saw a decline of 3.2% during Jul-Mar FY15, against the 5.8% export growth envisaged in the Annual Plan FY15. Though weak external demand played a role, the real issue remains the structural bottlenecks. A well-thought long-term industrial policy aligned with the country’s strategic objective is a pre-requisite.