Pakistan Economy: An Update
Published 11 December 2014
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0.1 Summary
Consumer confidence bounces back, demonstrating resilience to recent uncertainty. The IMF programme is back on track, a $1.1 billion disbursement is expected later this month. Lower global oil prices have provided an economic and political breathing space; a successful Islamic bond issue has also helped. But sustained progress is linked to the Government’s commitment to further reform.
0.2 Detail
Economic Resilience
Despite over 4 months of anti-Government protests, direct losses to the economy appear limited. The IMF’s GDP growth forecast for FY14 /15 remains unchanged at 4.3% - albeit lower than the official 5.1% target. Consumer confidence, which recorded its largest drop on record in September , rebounded last month. The Karachi Stock Exchange has recovered from its initial slump following the August “sit in” by opposition parties ) - to become Asia’s second-best performer with calendar-year-to-date returns of over 27%. The market has also received a boost from 10 IPOs in 2014 compared with just 3 last year.
IMF Programme Back on Track
The main casualty of the summer’s l unrest has been the pace of economic reform. As a result, the Government pushed back on commitments to the IMF to raise power tariffs. This delayed the programme’s Fourth Review; a combined Fourth and Fifth Review took place in Dubai last month. Two tranches totalling $1.1 billion are likely to be approved by the Fund Board on 17 December
Gift of Global Oil Prices
The decline in global crude prices could cut Pakistan’s oil-import bill by $ 2 billion (around 1% of GDP) a year. This is both an economic and political blessing.. It has allowed a hike in power tariffs to partly satisfy the IMF, while falling generation costs offset the rise for consumers.. The fall in energy prices, alongside one in food items, has seen inflation decline to a multi-decade low of 3.96% in November. This allowed the State Bank to cut its policy rate 50 basis points to 9.5%, in line with market expectations, with analysts expecting further cuts. The downside to lower oil prices is that sales tax receipts could also be lower than budgeted, making it harder to meet fiscal revenue targets.
A Much Needed GSP+ Boost to Trade
While the country’s trade deficit for the 4 months to October grew by a fifth, GSP+ status, awarded to Pakistan in January, is seen by analysts as the primary driver for a 20% increase in the country’s textile exports to the EU over the same period. The Commerce Minister expects this to be worth £650 million for the full calendar year. Textile exports have also benefited from a one-third fall in domestic cotton prices over the year. Going forward, a recent Government decision to divert some natural gas from power plants to textile firms is likely to boost production further. A rise in exports to the UK under the scheme could also help towards meeting our bilateral trade and investment target of £3 billion by the end of 2015.
External Accounts
The Government raised $1.1 billion (£700 million) - twice the planned amount - in a successful Sukuk Islamic bond issue earlier this month. This should compensate for the delay (due to the fall in global oil prices) of the planned sale of a stake in the Oil and Gas Development Company Limited (OGDCL) on the London Stock Exchange last month. Combined foreign reserves of the State Bank and commercial banks have nearly tripled to £8 billion in the past year, providing just less than 2 months import cover. The IMF expects these to rise to £13 billion (3 months cover) by June 2015 following IMF disbursements, realisation of proceeds from the Sukuk bond and SBP purchases of dollars from the market.
0.3 Comment
The economic outlook is now improving following the hiatus over the summer. The Government deserves credit for getting the IMF programme back on track. . Further reforms to meet the Government’s IMF programme commitments, including the privatisation of major loss-making State-owned enterprises have become more challenging. .