As soon as the PTI government will sworn in, it will face difficult economic situation from the day one. Pakistani economy facing many problems including rising imports, widening trade and current account deficits and falling foreign exchange reserves. PTI government will be forced to make hard decisions to stabilise the economic situation.
PTI has promised to create two million jobs a year and to build one million houses each year in next five years. PTI only can fulfill its promises when the economy grows at fast pace. PTI government not only has to increase the exports but also to control the imports. The other challenge would be to widen the tax base and net to collect more taxes. Imran Khan has pledged to double the tax collection.
The real challenge is to bring the traders and agriculture sector in the tax net. Both sectors hardly pay taxes. The potential to collect more taxes are there but strong political will needed to achieve such goals and targets.
The real challenge is not just to create jobs in the private sector but to create decent paid jobs for the educated youth. Pakistan needs radical economic reforms to change the structure of the economy which should work for the benefit of all Pakistanis. Pakistan needs economic growth and development which can improve the lives of millions of poor Pakistanis. To reduce poverty, unemployment and inequality are the major challenges before the PTI government.
Here, we are just looking at the current state of the economy and challenges lie ahead of PTI government. The PTI government might not be able to enjoy a short honeymoon period because of economic challenges it faces. It needs to address them immediately.
If we look at the numbers, the current account deficit during FY2018 widened 42.6 percent to $17.99 billion compared to $12.62 billion in the previous year. On the other hand, during the period under review, the trade deficit swelled 16.5 percent to $31.1 billion compared to $26.7 billion during FY2017.
Our exports (free on board) during FY2018 bounced back to reach $24.8 billion, which is 12.6 percent higher compared to $22 billion during FY2017. This rebound was a result of economic recovery of our major export destinations, which revived demand, and improving local economy that boosted supply side and exportable surplus.
Imports during FY2018 hit a staggering $ 55.85 billion, up 14.7 percent compared to $48.68 billion registered in FY2017. The rising imports can be attributed to improving growth, China-Pakistan Economic Corridor (CPEC) and other developmental activities. The machinery group imports posted a growth of 20 percent, petroleum group 25 percent, metal group 30.3 percent, while transport group registered an increase of 21.3 percent in the period. Moreover during the last fiscal year, additional imports of over $7 billion were also recorded with food group contributing 1.1 percent, machinery group 20 percent, transport group 7.9 percent, petroleum group 37.1 percent, agriculture and other chemical group 16.6 percent, and metal group 15.5 percent.
Over the years workers’ remittances have remained a mainstay of our external sector. During FY2018, remittances rebounded to hit $19.6 billion, showing a growth of 1.4 percent.
Foreign Direct Investment (FDI) is also an important source of non-debt creating foreign inflows. However, it almost remained stagnant at $ 2.77 billion during the last two years. Amid a rising current account deficit and FDI stagnancy, the government floated bonds worth $2.5 billion during FY2018 and also borrowed $ 8.4 billion from other bilateral and multilateral agencies, while it repaid an amount of $4.1 billion in last fiscal year.
However, the widening current account deficit, amid insufficient financial inflows to finance it, mounted pressure on State Bank of Pakistan’s (SBP) liquid foreign exchange reserves that declined by $6.4 billion, and rupee depreciated 11.9 percent against dollar on a year-on-year basis, whereas the real effective exchange rate (REER) depreciated 12.3 percent year-on-year.
In FY2017, Pakistan’s exports as a percentage of GDP were 7.2 percent, while India’s stood at 12.4 percent. Similarly, Pakistan’s imports were 16 percent of the GDP and Indian’s 17.3 percent. The trade deficit, during this period, for Pakistan and India was 8.7 percent and 4.9 percent of the GDP, respectively.
During FY2017, invisibles credits (services, workers’ remittances and other income) as percentage of the GDP in India and Pakistan were 10.6 percent and 9.8 percent, while invisibles debits were recorded at 6.4 percent and 5.2 percent of the GDP, respectively.
Resultantly, India and Pakistan’s current account deficit was 0.7 percent and 4.1 percent of the GDP, respectively. The foreign investment in India and Pakistan was 2.2 percent and 0.9 percent of the GDP, respectively.
It is evident that Pakistan needs to enhance its exports by 4-5 percent of the GDP and also encourage non debt creating inflows like FDIs to make its external account sustainable.
Pakistan is facing twin deficit challenge. The fiscal deficit affects the trade and current account deficit as the enhanced public expenses lead to higher domestic demand, which is partially met by additional imports. Our propensity to import is high and in case the increase in exports does not keep pace with the imports, which generally happens in Pakistan, the trade deficit goes up. Furthermore, fiscal expansion increases the demand for money that ultimately pushes upward the markup rate. In turn, it raises the cost of doing business and adversely affects competitiveness of the domestic industry.
Pakistan’s major problem for growth in economy as well as exports traces its origin in inadequacy of investment in key areas. The investment in the past could not create incentive structure for exports-based industry in the country. The FDI inflows are not only low but they are not coming in export-oriented sectors. We need to enhance the FDI by improving image of Pakistan and key rankings in indices like Ease of Doing Business (EODB), Human Development Index (HDI), and Global Competitiveness Index (GCR).
Pakistan ranks at 115 in Global Competitiveness Report (GCR) 2017-18. In terms of institutions, infrastructure, macroeconomic environment and health and primary education, Pakistan is placed at 90, 110, 106 and 129, while India ranked at 29, 66, 80 and 91. Our position with other countries like Vietnam, China, and Sri Lanka is also not well. According to researchers, the competitiveness effect includes trade policy, changes in the real exchange rate, tariff structure and structural reforms. We need to improve our competiveness.
On EODB status Pakistan dropped to 147th rank from its previous 144th position. The World Bank’s EODB report uses 11 indicators to measure aspects of business regulation that matter for entrepreneurship. We need to improve on these indicators to encourage investment in the country and reduce cost of doing business.
Trade integration and facilitation have positive and significant impact on economic growth. It helps to increase volume of trade. However, according to EODB 2017-18 report’s indicator on Trading Across Borders Pakistan is ranked 171, while India, Vietnam, China, and Sri Lanka stand at 146, 94, 97, and 86, respectively.
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