LAHORE: The economic growth rate picked up modestly in 2015-16; however, there was no visible effort to address the structural issues faced by the economy, stated the annual review of the economy 2015-16 released today by the Institute for Policy Reforms (IPR).
The report recognises that some economic indicators improved. These include the fiscal deficit, inflation, and the current account deficit. “For the first time in many years, government achieved and exceeded its Federal Board of Revenue (FBR) tax collection target, which grew by 20 percent. The current expenditure remained within budget and low mark-up rates increased the demand for private credit,” the report added.
However, the economy’s future prospects depend on much needed policy changes. There are fundamental issues that prevent the economy to achieve sustained economic growth, it said. The economic growth must be based on two pillars, which are improved long term fundamentals, and higher level of productivity, it added.
Meanwhile, the public debt has increased rapidly with some external financing procured at high cost. The report states that Pakistan’s external sector is weak. The exports fell in 2015-16, foreign direct investment (FDI) was low despite inflows from China, and workers’ remittance was presently in modest growth. However, it could drop or slow down by the effects of energy prices on Middle Eastern economies, it added.
While quoting IMF, the report states that in the next four years, current account deficit would remain between minus 1.8 percent to minus 2.3 percent of GDP and FDI would remain modest. The annual external financing needs would grow from $7.3 billion in 2015-16 to $14.4 Billion in 2019-20. The short term debt was expected to grow steeply from 4.2 percent to 8 percent of GDP, it added.
Higher productivity, the second growth pillar, comes from better infrastructure, upgraded skills, research and development (R&D), and improvement in governance to reduce transaction cost, it said. “So far we have not seen a major policy initiative to empower economic players and improve governance. The governments, federal and provincial, have yet to launch a meaningful programme to invest in the people,” it added.
The productive sector of the economy remains sluggish. Production of major crops fell by 6.25 percent, it said. IPR fears that there may be structural issues at play here. Policy makers have done little to address water availability and its efficient use. In fact, federal allocation for the water sector has declined in the last two years. The Industry grew by 3.21percent, it added.
The report said that it was encouraging to see private sector credit increased by 105 percent, adding that half of the additional credit has gone into fixed investment, though the share of manufacturing in new private investment has declined. The economy was still constrained by power shortage and though new investment would increase generation capacity, there was no policy shift to make the total power supply chain efficient.
Similarly, savings and investment remained below the economy’s need to grow. The government was expected to make negative savings for the foreseeable future, it said. While development expenditure, including the China-Pakistan Economic Corridor (CPEC), had increased from the previous year, questions remained about project selection, transparent procurement, and effective project management. These issues reduce the returns to the economy from PSDP spending, it added.
The policy makers, to support growth, must review the political economy. It shows most obviously in the structure of public finance both in revenue collection, but equally in expenditure priorities. Delay in addressing this issue would lead to high government debt and does not allow sufficient public investment. The economy needs an urgent and effective response to the constraining structural issues, the report concluded.