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07 - 13 July , 2012

State Of The Economy
The central bank recognises that Pakistan's undocumented economy is vibrant and supporting well during the worst period

State Of The Economy

Some of the critics often term Pakistan a failed state. The incumbent government is also accused of not managing the economy prudently. Since this government has assumed charge, political situation has remained highly volatile. Killing of OBL in Abbottabad and attack on border post, in which more than two dozen soldiers were killed plunged US-Pakistan relationship to the lowest. Withholding of payments under CSF by the US has added to the financial woes of the country.
Despite many uncertainties two points provide some satisfaction: 1) Pakistan is likely to achieve above 3.5% GDP growth rate for just concluded financial year and 2) exports of US$25 billion. There seems no respite in electricity and gas load shedding. Rupee has been depreciating and oil imports are on the rise. Balance of payment situation could have gone real precarious had there not been the record inflow of remittances. Inflow of FDI is almost stagnant and situation of portfolio investment is also far from satisfactory.
Many experts have been saying that the resilient undocumented economy has been providing support; else the situation at face value does not appear satisfactory. This is for the first time that the State Bank of Pakistan (SBP) has also accepted the fact. Dr. Mushtaq A. Khan, Chief Economic Adviser, SBP, is on record when he said, "There is a growing sense that Pakistan's undocumented economy is vibrant, and that official data understates the level of economic activity that can be seen." It is an issue to State Of The Economyinvestigate why the size of documented economy has not grown, the way undocumented economy has flourished?
On face value the prevailing situation can be attributed to failure of the tax collecting regime to perform its duty diligently and efficiently. Over the years commodity prices have gone up substantially, but tax collected on agriculture income has gone down drastically. While this dismal state is being attributed to various factors, no one can deny the fact that feudal lords enjoying majority in the National Assembly, provincial assemblies and the Senate are not ready to pay any tax on their incomes.
According to the SBP, GDP growth rate for FY12 is estimated at 3.7%, which is notable considering damage to cotton crop due to floods and persistent energy shortages. Among others, the central bank notes that GDP growth was supported by a pickup in construction activities. However, it has been observed that these were primarily financed by project aid whereby sustainability of private sector construction activities remains questionable.
NFNE remains stubborn in double digits, which poses risks in the event of another shock from floods, which is likely to be more intense this monsoon. The SBP largely attributes entrenched inflationary expectations to continued borrowing by the Government of Pakistan. Over Rs199 billion were borrowed during 9MFY12 against a commitment of net zero borrowing.
This in turn emanates from chronic fiscal slippages and non-materialisation of targeted one-off proceeds in FY12. Over the near-term, analysts believe that interest rates have bottomed out. The money market seems in tandem. The realised amount in 3-month T-bills comprised 40% of total funds realised from auction of T-bill during 3QFY12 as against less than 10% of total mobilisation during 1HFY12.
SBP quarterly report also shows that financing the current account remains a big challenge, if expected State Of The Economyproceeds from auction of 3G spectrum are not realised and US$800 million are not paid by Etisalat. It is also feared Pakistan may also face delay in issue of letter of comfort by the International Monetary Fund.
The other disturbing factor is that country's foreign exchange reserves have declined substantially and over the past eleven months shrunk to US$15 billion, barely sufficient to cover import of less than five months.
Current account balance may witness some reprieve on the back of decline in international crude oil price due to recessionary pressures reemerging in the developed countries.
As per our estimates every USD5/barrel decline in crude oil price will result in a benefit of USD65mn a month. At prevailing Arab Light price of USD92/barrel this amounts to a saving of approximately USD170mn a month.
A caveat stems from higher import of fuel oil as the government may take populist measure of increasing electricity supply by increasing generation through furnace oil based power plants.
Pakistan has to repay approximately USD475mn during 1QFY13. Combining this amount with principal repayment to multilateral institutions, Paris club and other institutions, the total outlay during 1QFY13 is estimated to be in the vicinity of USD850mn to USD900mn.
Under this backdrop, we opine that PKR could depreciate by 8% during FY13, over and above its average depreciation rate of 6.9% witnessed during last two decades.

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