Rebuilding Pakistan’s economy

The writer is Federal Minister of Finance

After eight months of the present government, and at a time when the second review of the IMF is completed, it is important to look back on what have we achieved over this period and see whether the economic course charted out by the PML-N has produced results.

On June 5, 2013, when Nawaz Sharif was sworn in as prime minister, the economy of Pakistan was in tatters. Long power outages had disrupted normal life and stifled economic growth and there were reports that private businesses were moving out. With huge repayments due from a previous IMF loan, the stark reality of a default was looming large.

The PML-N’s immediate priority was to focus on electricity and economy, including stability of dwindling foreign reserves. Within a few weeks of taking charge, we set out an action plan for improving the electricity crisis and announced the Power Policy 2013. Our prompt response was clearance of liabilities in the electricity system – known as ‘circular debt’. To avert default on our loan obligations and to gain international acceptance of our economic strategy, we approached the IMF. This time, we did not need large sums of money. Pakistan has to repay more than $5 billion during the 2013 to 2015 period, including $3 billion which have become due in the current fiscal year 2013 to 2014. We, therefore, had no choice other than re-engaging ourselves with the IMF for a new loan programme.

The next step was to start the economic rebuilding plan. We presented an austerity budget by cutting wasteful expenditure, reducing a number of ministries, and abolishing discretionary grants. Secondly, our priority is to increase tax revenues. Next, we abolished the system of general subsidy so our revised subsidy policy only targets low income segments of society. To increase investments in the country, the PM announced youth loan, fee reimbursement and laptop schemes. For businesses, he announced incentives to increase the business footprint in the country as well as a deregulation plan that includes a greater role of private equity in businesses that had been mismanaged by successive governments.

Our strategy for rebuilding the economy has received recognition but also been the focus of debate on local media. A furore was raised as the dollar was traded at just under Rs111. On balance, economists voiced their concerns on the difficulties summoned by agreeing to a programme that would again seal the reputation of Pakistan as a ‘single tranche country’. It was also hammered that there were hidden provisions that would result in major devaluation of the currency, increase inflation and force wholesale auction of public sector assets at throwaway prices.

While economic strategies take time for results to emerge, one can share some early fruits of the plans.

The economy has started to grow, with the quarterly national accounts pointing to a GDP growth rate of 5% in the first quarter of 2013-2014, compared to 2.9% in the first quarter of 2012-2013.

Inflationary pressures have started to ease, and as compared to inflation in November 2013, prices in December 2013 and January 2014 have witnessed reduced momentum.

Budget borrowings have reduced drastically. As against an IMF target of 3.5% for the first six months, budget deficit has been recorded at 2.2%, even better than 2.6% actual recorded in the same period last year.

Exports are also picking up, with the exports (fob) up by 3.2% in the first six months, compared to the same period last year. The most significant increase was recorded in textiles which increased by 8%.

Home remittances in the first six months have also recorded a growth of 9.5%, indicating a healthy growth over a high base and much above the target growth of 6%.

The rupee has stabilised; measures have brought about the exchange rate stability and it is trading steadily around Rs105 a dollar to 106 a dollar range without any significant speculative activity.

Reserves have moderately stabilised and are expected to grow in coming months.

Our stock exchange is thriving, and over the past seven months, the Karachi Stock Exchange has performed better when compared with a host of other stock exchanges around the world.

While there is good news on many fronts, our challenges include increasing investments both from domestic and foreign sources so that job creation can be enhanced, building up of reserves without incurring high debts, increasing tax collections and employing better ways in using them, managing our national assets in a more productive manner, and focusing on human development.

Going forward, some important initiatives include deregulation, increased investments to enhance energy security, undertaking of structural reforms to improve management of public finances especially improvement in tax collections, making Pakistan an attractive investment destination, and a new economic growth policy.

All major indicators of the economy are pointing to the fact that the economy has begun to show signs of revival and that it is moving on the right track. Challenges remain on the horizon and much work remains to be done, but the key to continued success would be to remain on course and avoid distractions that can sway energies in undesirable directions.