Emerging economic growth trends, which seem to be reversing the decades-old process of de-industrialisation, have become more pronounced in the first half of the current fiscal year.

Over this period, the central bank’s data shows that “growth-inducing capital goods — import of machinery, fuel and metal groups — accounted for more than half of the total ($24.4bn) imports.” There is pro-growth change in the country’s import composition.

However, this trend has yet to impact inter-sectoral balance among industry, agriculture and the services sector though the recovery is more broad-based. The SBP expects the industry and services sector to grow at last year’s level and a ‘rebound in agriculture’ that may have to be reassessed in the light of severe water shortage for kharif crops.

The State Bank’s second quarterly report 2016-17 strengthens the impression that apart from better capacity utilisation by segments such as steel and cement, the industrial sector is now entering the expansionary phase, shifting somewhat from what is generally considered a consolidation effort.

In the first half of the current fiscal year, machinery group contributed a huge 73.3pc to the increase in total imports. The items include machinery for power generation, textiles, construction, mining and electrical sector.

To meet the rising domestic demand several industries including cement, steel, beverages and automobiles have announced expansion plans and some projects are already underway that will enhance the economy’s future production capacity. This indicates that much of the excess money in the market is now finding productive outlets.

But a major problem that still remains to be addressed is the local production of capital goods in areas where simple manufactures are at a fairly developed stage. This is required to reduce the import bill on account of plants and machinery.

“It appears that the bulk of the power generation machinery imports are being financed outside the Pakistani banking channel”

Will this virtuous cycle of growth be sustainable? In the central bank’s opinion when the economy is taking off it is natural to expect some widening of the current account deficit but stressed that it needs to be contained to sustainable levels.

Currently the SBP maintains that external flows are financing the current account deficits and foreign exchange reserves are at a comfortable level despite almost doubling the current account deficit during the six months ending December 2016 compared to December 2015.

The SBP quarterly report notes: it appears that the bulk of the power generation machinery imports are being financed outside the Pakistani banking channel. Over the past two and a half years there has been a relatively minor increase in these import- based L/C level data provided by the commercial banks to the SBP,

The difference between customs-reported imported figures compiled by the Pakistan Bureau of Statistics and the bank data on receipts of export proceeds have widened sharply.

The 10-year average difference of the two data sets has widened (starting from fiscal year 2015) to an unprecedented $3bn during July-December last year, up from the decade’s average of $1.6bn for the comparable six months periods.

As most power sector activity is taking place under the CPEC umbrella, the central bank thinks that the widening gap between two import data sets is probably linked to the CPEC accord signed in April 2014.

Yet another significant development is the increased ‘merger and acquisition’ activity. The SBP quarterly report observes: “Pakistan finally is getting a slice of global M &A activity” as the country had earlier missed out on this global trend. In this fiscal year “the dynamics seems to have changed.”

Multiple M&A’s indicate that “professionally managed and innovative Pakistani firms are now also on the screens of foreign investors looking to get a foothold into 194 million strong market”.

Apart from Chinese investment, acquisition deals were reported in food processing and electronics sector in second quarter of this fiscal year by Dutch and Turkish firms respectively.

M&A activity was also visible in power, automobile and pharmaceutical industries and is expected to improve efficiency and productivity.

The central bank feels that this activity should also be directed towards boosting exports. In Pakistan’s case, foreign capital spending was always focused on domestic market.

Policymakers need to encourage foreign investment in priority areas designed to end structural imbalances and put the economy on the path of sustainable economic growth.

Published in Dawn, Economic & Business, April 10th, 2017