LAHORE: A significantly ‘overvalued’ rupee has impaired competitiveness of Pakistan’s exports that dropped by 17 per cent in July, the first month of this fiscal year, to $1.6 billion from $1.923bn a year ago.

The precipitous drop in exports represents the “biggest threat” to the growth of the manufacturing sector, the Institute for Policy Reforms (IPR), a Lahore-based think tank, warns in a report issued on Wednesday.

The report on the performance of the national economy entitled as Early Warning Signs says the recent developments are beginning to cast some doubts about the ability of the economy to perform as well as anticipated in 2015-16.

The Annual Plan approved by the National Economic Council (NEC) for this fiscal year targets a GDP growth rate of 5pc. (The last time an above 5pc growth rate was achieved was as far back as in 2006-07.) The plan expects the (manufacturing) industry to lead the growth process, with a growth rate approaching 6.5pc and exports to pick up, after four years of stagnation, with a growth rate of over 5pc.

The plan targets inflation to average 6pc over the year and projects investment to revive sharply from about 15pc to almost 18pc of GDP. The remittances are expected to continue growing and foreign direct investment (FDI) is targeted to double over the level in 2014-15.

Sounding a warning that the government may not be able to achieve the “ambitious targets” set in its Annual Plan for this fiscal year, it pointed out that the textile industry was up in revolt after the imposition of taxes and surcharges on electricity and gas.

“The rupee remains significantly overvalued and this has impaired the competitiveness of our exports. Similarly, after a long time, remittances are beginning to flatten out, with less than one per cent growth in July.”

The report adds: “The year, 2014-15, witnessed a major recovery in the iron and steel products industry, primarily because of resumption of production by the Pakistan Steel Mills (PSM). Almost one third of the overall growth of the large-scale manufacturing sector was due to the iron and steel industry. But the news has come that PSM is shutdown once again. In addition, industries like fertiliser are likely to be hit by the GIDC. Falling exports, rising costs and factory closures render difficult the prospect of achieving 6pc growth in manufacturing during the year.”

The IPR document said the on-going floods could end up damaging the crops in an area of almost one million acres. “In the presence of low commodity, prices and outstanding stocks of 0.5 million tonnes of Basmati rice and over two million tonnes of wheat, the procurement/support prices offered last year do not appear to be sustainable. Any reduction in prices could affect the supply response of farmers. Overall, it is beginning to look unlikely that the agricultural sector can achieve a relatively high growth rate of 4pc.”

The IPR report says the focus of public finances continues to be on further stabilisation, with a reduction in the fiscal deficit to 4.3pc of GDP to be achieved through a 20pc growth in FBR revenues and little or no growth in current expenditure at the federal level. In addition, the provinces are expected to generate a large combined cash surplus of Rs300bn.

Turning to inflation, it says the good news is that the year-to-year inflation in the consumer price index is down to only 1.8pc in July. The economy shows signs of having entered a period of low inflation or even deflation.

At the same it warns that as the ‘low base effect’ begins to take over, the rate of inflation could start rising once again and spike up to 5pc in the next 5-6 months. Also, low commodity prices, especially of oil, are likely to persist.

“The Annual Plan assumption of an average rate of inflation of 6pc in 2015-16 is likely to be on the higher side. This is, of course, good news for consumers but it will be very difficult to achieve a 20pc growth in FBR revenues. Already, in the first month, July, these revenues have shown growth of only 11pc. We are likely, therefore, to see a spate of mini-budgets, like last year.”

The revival of investment will hinge on increase in public and private investment, which showed no signs of recovery during the first month of this fiscal year, the report says, adding the increase in currency in circulation by almost Rs112bn and decline in bank deposits of Rs38bn – whether because of the banking transaction tax or low interest rates – are a cause of concern.

Summing up the economic performance in July, it says: “Overall the outcomes in the first month of the present fiscal have not been very promising. Hopefully, part of this is either random or seasonal in nature. But there are some early warning signs and corrective policy actions may need to be considered sooner than later.”

Published in Dawn, August 13th, 2015

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