‘Fears are baseless’
ISLAMABAD: Finance Minister Abdul Hafeez Shaikh believes the country’s economic fundamentals are stable enough to absorb global and domestic challenges, meet international obligations and provide room for the revival of private investment.
The minister added that the government was on the path of fiscal prudence despite election pressures, and faced no immediate problem as far as balance of payments is concerned. The following are excerpts of the interview:
Q. What is the outlook for Pakistan’s economy, especially the external accounts?
A. To address the inherited challenges, the government designed prudent policies that helped macroeconomic stability. The GDP growth last year stood at 3.7 per cent despite floods that affected major and minor crops. For the current year, the GDP growth is targeted at 4.3 per cent with contributions from agriculture, manufacturing and services by 4.1 per cent, 4.4 per cent and 4.6 per cent respectively.
Preliminary estimates suggest higher than targeted cotton and sugarcane production that would help achieve 4.1 per cent growth in agriculture. The mining and quarrying sector is projected to grow by 3 per cent. The services sector is targeted to grow by 4.6 per cent in 2012-13 on the back of contributions from transport, storage and communication (2.5 per cent) wholesale and retail trade (4.1 per cent) and finance and insurance (4.5 per cent).
In September this year, Large Scale Manufacturing (LSM) grew by 4.1 per cent compared to 2.70 per cent in the same period last year. On average in July-September, LSM grew by 1.9 per cent. The industrial output re-bounced owing to better gas and power supply to the industrial units and supportive policies, particularly the revival of Pakistan Steel Mills and lowering sales tax on tractors.
The positive growth came from Paper and Board 35.97 per cent, rubber products 33.06 per cent, iron and steel products 16.07 per cent, food beverages and tobacco 6.47 per cent, chemicals 6.15 per cent, leather products 5.56 per cent, non-metallic mineral products 4.20 per cent, pharmaceuticals 4.09 per cent and coke and petroleum products 3.41 per cent.
The investment-to-GDP ratio is targeted to improve from the current level of 12.5 per cent to 13.1 per cent, to be contributed both by the public and private investment.
The Consumer Price Index was recorded at 11.0 per cent (below the target) in fiscal 2012 against 13.7 per cent in 2011. In October 2012, the inflation remained at single digit 7.7 per cent compared to 11.0 per cent in the comparable period of last year. This is the fourth consecutive month where CPI remained at the single digit level. The food and non-food inflation stood at 5.2 per cent and 9.3 per cent respectively.
On the fiscal front, the government took various measures to boost economic activities and achieve fiscal consolidation. The fiscal strategy was aimed at expanding the resource envelope by tapping ‘tax buoyancy’ and by containing the current expenditure. The government considers the importance of fiscal discipline for economic growth and hence consolidation efforts were kept at the top of its macroeconomic agenda through prudent expenditure management and better resource mobilisation.
Steps are also being taken to increase revenues through various initiatives such as broadening of tax base, monitoring and risk-based audit, strengthening electronic payment, close watch on Afghan transit trade, and recovering arrears etc.
Furthermore, the government is following the self-dependence strategy, according to which more and more new tax-payers are being brought under the net. Also, the sectors with zero-rating facility have also been brought under the tax net. Additionally, during the current fiscal year, Sales tax rate has been reduced from 17 per cent to 16 per cent, all special excise duties have been removed, 392 regulatory duties have been abolished and major rationalisation in excise duties; Federal Excise Duties have been eliminated or rates decreased.
As a result, FBR collection has increased from Rs1008 billion in 2007-08 to Rs1906 billion in 2011-12. Last year growth was 21 per cent. Secondly, fiscal austerity has been the hallmark of this government. Federal expenditure has been growing at 6 per cent per annum in nominal term. Expenditure on running of the civil government is almost flat for the last two years.
During the first quarter of the current fiscal, deficit stood at 1.2 per cent of GDP against 1.3 per cent recorded in the comparable period last year. On the revenue side during July- October, FBR tax collection stood at Rs537.6 billion as compared to Rs507.2 billion during the same period last year.
On the external side, despite recession in Eurozone and other challenges, exports were almost closer to last year, recorded at $24.7 billion against $25.4 billion last year. The workers’ remittances have moved from $6.5 billion in 2007-08 to $13.2 billion in 2011-12. The current year trend of first four months suggests rising trend and it is expected to reach $14 billion.
During July-October, the worker’s remittances stood at $5.0 billion as against $4.3 billion last year, showing a growth of 15 per cent. Remittance inflows hit record high of $1.365 billion in October 2012 as against $1.017 billion sent in the same month of the last fiscal year, showing a tremendous increase of 34.2 per cent.
During the first Quarter of FY13, exports stood at $6.0 billion while imports amounted to $9.6 billion. In September 2012 alone, export had shown a growth of 2.5 per cent. On a positive note, our exports witnessed the rebound of value added exports in the textile sector as well as increase in exports of non-traditional items such as jewellery etc.
Current account balance remained surplus during the first quarter to the tune of $432 million against a deficit of $1339 million during same period last year. This had a spill-over effect on the capital market which has shown a sign of tremendous recovery and investor confidence in our economy.
The favourable increase in remittances and realisation of external inflows under Coalition Support Funds (CSF) resulted in an improved current account balance during the period under review. This is indeed a positive indication for Pakistan’s economy and will further reduce the pressure on country’s external accounts through exchange rate stability and strengthening the foreign exchange reserves.
Restructuring of PSEs has been key reform agenda. Implementation of Power Sector Plan 2010 has been expedited and upgraded under the Power Sector Recovery Plan 2011. Central Power Purchase Authority and National Transmission and Dispatch Company have been reconstituted with professional and autonomous Board of Directors.
The government is expediting conversion of plants to cheaper primary fuels and efficient technologies. Private sector receivables recovery plan has been finalised to ensure 100 per cent recovery of current bills. Board of Directors of Pakistan Steel Mills (PSM) has been reconstituted and a restructuring plan is being implemented under the Cabinet Committee on Restructuring (CCOR), which has operationalised a restructuring framework for Pakistan Railways as well. The Board of Directors has been reconstituted on corporate pattern. Repair of locomotives and freight operations are being prioritised. For resource mobilisation, Public Private Partnerships are being encouraged.
Under the restructuring plan of Pakistan International Airlines, cost-minimisation and revenue enhancement measures have been put in place to reduce revenue-expenditure gap in the medium term. Financial restructuring plan has been finalised which includes equity injection, rollover of loans and government guaranteed loans among others.
Q. Without additional foreign inflows, and IMF repayments, is the BOP situation under control?
A. Pakistan is discharging its obligations towards IMF and other lenders on a regular basis. We have paid $2 billion to IMF so far. The situation is well under control and we will continue to discharge our future obligations with ease.
Q. Is the Finance Ministry involved in any way in the process of Monetary Policy decision?
A. State Bank of Pakistan is completely autonomous. The monetary policy decisions are taken by the SBP and Finance Division is in no way involved in the process of monetary policy decisions.
Q. Has the IMF commented on easing of MP previous meetings?
A. In the press release after the conclusion of the meetings, the IMF has underscored that “the ultimate goal of the State Bank of Pakistan (SBP) should be to bring inflation down significantly by using its policy tools” which is now manifested in declining inflation.
Q. Will government borrowing increase in the election year?
A. Fiscal operation of the first quarter of the current financial year remains satisfactory. The overall fiscal deficit for the said period was 1.2 per cent of GDP as against a deficit of 4.7 per cent for the whole year. The SBP borrowing remained negative at Rs412 billion during this period. It clearly shows that there is no pressure of the election year on the government where spending has been in line with budgetary allocations so far.
Q. If government keeps borrowing from the banks, then why would banks lend to the private sector?
A. Recent reduction in discount rate is meant to stimulate private sector investment. Government is also reducing its borrowings from the banking sector to create more room got the private sector. The government borrowing was Rs491 billion with negative borrowing from SBP up to November, 13 this year compared to Rs740 billion with SBP borrowing of Rs114 billion last year.