Pakistan stock market slides, economy at a crossroads

Irshad Salim — Pakistan’s stock index lost 2,668 points or 5.4 per cent in a week to close at 46,859 ending at its lowest level of 2017.

Historically, the Pakistan Stock Market (KSE100) reached an all time high of 52876.46 in May of 2017. The benchmark had grown almost 46% in 2016 — a stellar growth by all account. Some experts attributed it to equity market reforms, including the integration of the country’s three stock exchanges, improved governance, continuity and risk management.

However, the country’s stock market is expected to remain jittery on political uncertainty, volatile international oil prices and the resumption of foreign outflows partly due to its inclusion in MSCI as an emerging market.

Some major developments during the week included: foreign exchange reserves fell to 19-month low of $20.15bn; trade deficit widened to record $30bn and the International Monetary Fund (IMF) said on Friday that the macroeconomic stability gains the country had achieved in the past four years have started to erode and could pose risks to its positive economic outlook. Additionally, Pakistan’s Supreme Court appointed Joint Investigation Team (JIT) continued to probe the Sharifs on Panama Papers case.

The global lender released a communiqué recently depicting a gloomy future outlook for Pakistan’s economy that is in complete contrast to the ‘feel good’ picture portrayed by Finance Minister Ishaq Dar, said local newspaper The Express Tribune.

The IMF also said the government’s debt is equal to almost 67% of GDP, significantly higher than 59% Pakistan’s finance minister claimed in front of the National Assembly this week. The lender puts Pakistan’s debt at over Rs21.2 trillion while Dar claimed it was Rs18.9 trillion.

AKD Securities brokerage firm analysts said the continued political noise from updates on the Panama Papers investigation is likely to keep investors on the edge. “Sustainable recovery remains unlikely amid lack of triggers and shortened days in Ramadan ahead of Eid holidays,” the brokerage added.

However, the IMF said Pakistan’s macro outlook for economic growth is favorable, with real GDP estimated at 5.3% in the outgoing fiscal year, strengthening to 6% over the medium term on the back of stepped-up China-Pakistan Economic Corridor (CPEC) investments and loans, improved availability of energy, and growth-supporting structural reforms. Inflation has been gradually increasing but remains contained, and the financial sector has remained sound. But it said that this favorable outlook is now facing risks.

Hopes are pinned on the CPEC — a $62 billion initiative by Beijing that aims to link the Asian superpower’s Xinjiang region with the Arabian Sea through Pakistan. The plan encompasses a series of infrastructure, power and transport upgrades that Islamabad hopes will kickstart the economy.

But experts claim the deal is opaque, and much more transparency is needed before they can assess any impact for Pakistan — including, for example, whether the $62 billion is an investment or a loan, or a combination of investments, loans, commercial credits, etc.

The lender’s fresh assessment of Pakistan’s economy is seemingly close to a situation predicted by independent Pakistani economists and experts, “but the global lender ignored those warnings and adopted an ‘accommodative approach’ to favor Pakistan,” the paper says.

“These independent economists have also projected that Pakistan will again seek out an IMF program by 2018, although Dar has publicly claimed that Pakistan will not avail another loan from the lender even in 2019,” it said.

Other things being equal, the informal economy, smuggling, and lack of political will continue to deter real and obvious economic growth – a trend which was inherited by successive governments years ago.

In a related note, the top official from the United Nations Development Program (UNDP) in the Asia-Pacific region has said that low tax-to-GDP ratio is critical for development in Pakistan and the government should look into the taxation issue. The IMF and the World Bank have been making similar assessments for some time now.

UN Assistant Secretary-General and Regional Director of UNDP for Asia and the Pacific Haoliang Xu regretted that the tax-to-GDP ratio, which used to be 13 to 14 per cent in Pakistan, has gone down to 10pc. Why the tax-to-GDP ratio is persistently low? The Pakistanis will have to look into it, he said.

Mr. Xu who was on a four-day visit to Pakistan said, “if Pakistan does not have enough resources needed for investment in education, health, infrastructure and social protection then the Pakistani population cannot expect the government — both federal and provincial — can deliver on their expectations.”

Citing the example of Bangladesh, the UNDP official said Bangladesh is maintaining the tax-to-GDP ratio between 13 to 14pc and its government is now aiming to raise 18pc of resources from local sources to fund the five-year development plan. It is also said to be negotiating with China for a mix bag of investment, loans, grants, aid, and hybrid models — apparently leveraging its position to the hilt.

African countries too were maintaining tax-to-GDP ratio at 18pc, the UNDP regional official emphasized.

A report released by Pakistan Institute of Development Economics (PIDE) in 2012 suggested that the size of the informal economy (non-taxed) in Pakistan ranged between 74 per cent to 91 per cent of the formal economy.

Several experts concur that not all is well. Revenue growth is slowing, with the fiscal deficit growing for the first time in three years. Exports continue to fall as imports grow, substantially increasing the current account deficit. Investments rates – already low – fell further in FY16. The energy sector circular debt has resurfaced. There is a possibility that Pakistan may lose its impressive gains achieved over the past four years.

According to Dr. Aamir Khan, some of the reasons for these emerging challenges are as follows. As the government nears four years in office, progress on reforms is slowing down. Privatization efforts have stalled, and FBR performance in tax collection is below target, after several years of strong performance. In Punjab, the province’s economy has struggled to create enough jobs for its growing young population. Whereas Vietnam, China and other South Asian countries have increased agricultural yields, Pakistan’s agricultural sector has lagged behind. Even remittances have fallen by 2.3% in the first nine months of FY17.

“My hypothesis is that for every educated child in Pakistan, at least five uneducated children are being produced. I also think that the proportion of the educated in Pakistan is actually falling. This full-throttled population growth will eventually cancel whatever progress we make, degrade environment and lead to a sharp decline in the law and order situation.”

Meanwhile, Xu  said that UNDP is providing support to the government for the preparation of a ten year development plan for the hitherto economic neverland of Pakistan — The Federally Administered Tribal Areas (FATA) which has been ground zero of terror-related effects for more than a decade and had never been considered part of the country’s socio-economic belt for various understandable reasons.

Those reasons and causes have now been somewhat addressed, with all political parties including FATA residents reportedly said to be willing to become part of the mainstream. That would be another game-changer for the country.

The ten-year socio-economic plan for FATA will bring development at par with the rest of the country, Xu said.

UNDP Country Director, Ignacio Artaza, who accompanied Mr Xu, explained that a future investment plan for FATA was also being developed. He said concrete actions are part of the plan including rehabilitation work, irrigation channels, roads, schools and health facilities for which UN agencies like Food and Agriculture Organisation, United Nations Children’s Fund, and The World Food Program will be involved.

So for good reasons, Pakistan economy is indeed at a crossroads. Thought-leaders know this. The present and successive governments may find enabling environment to move in the right direction — globalization of trade, connectivity are at work. Pakistan is positioned to become the center of economic gravity of the region with humongous opportunities. But there are challenges ahead.

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