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Pakistan: Planting economic seeds for a brighter tomorrow

As the South Asian nation lays a strong foundation for robust and consistent growth, the future looks brighter and more optimistic than ever

A few years ago a lot of international firms almost cringed at the idea of investing in Pakistan. Insecurity, instability and unfavourable business environment were the usual key words used to bail out of potential conversations. However, none of that holds true today. Pakistan  has made commendable progress in restoring macroeconomic stability and is a rising star in south Asia, exuding confidence and optimism like never before.
Karachi, Pakistan's financial hub of 20 million, is flourishing with a spur in real estate boom and new, upmarket seaside restaurants and cafes. In major cities car sales are on the rise and shopping malls are sprouting to cater for an expanding middle class.
The revived health of the economy is evident from the vital statistics: the annual GDP growth rate for the fiscal 2015-16 that ended on June 30 stood at 4.7 per cent - its fastest pace in eight years. In 2014-15, Pakistan grew at 4.2 per cent, as per Pakistan Economic Survey report.
Inflation, the cornerstone of a healthy economy, has been tamed at around 3 per cent from the highs 20 per cent in 2008, as per the latest Economic Survey published by the Government of Pakistan.
The government's budget deficit too eased from 8 per cent to 5 per cent of the GDP, and the current account deficit is now at 1 per cent of the GDP. Tax revenues have doubled in the last three years, and remittances have reached a whopping $19.9 billion for the fiscal ending on June 2016. The foreign exchange reserves too are at an all-time high at over $21.4 billion, enough to finance over five months of country's import bills. Rightly so, the Pakistani rupee has maintained exchange rate stability during
the year.
The interest rates are at a 43-year low allowing strong credit expansion and helping companies in various industries, such as industrial, food, beverage, textile, electricity and construction.
Investment in infrastructure has seen a significant jump, primarily fuelled by initiatives undertaken as part of the massive China-Pakistan Economic Corridor (CPEC).  The $46-billion commitment by China is expected to bolster Pakistan and turn it into a flourishing trade economy in a few years after completion.

Government initiatives

The first signs of improvement appeared in 2013 when Pakistan witnessed a peaceful transition of its civilian government for the first time in history. Since then the government has launched concerted programmes with the military to weed out extremism and terrorism from the soil of Pakistan and create an enabling environment. Zarb-e-Azb has immensely helped in this regard and a smooth implementation of the National Action Plan (NAP) too played an important role.
Concurrently, the government has also been working on the economic front by drafting prudent policies and implementing the same in time. In the last three years, financial coffers have been revived as the tax revenue doubled.
The government is now contouring plans to develop Pakistan into a manufacturing hub. It aims to diversify, grow at a consistently fast pace for the next 10 years, and emerge as the top 10 emerging markets from Asia and Africa. As of now, textile and automotive sectors are showing great potential and the fastest rate of growth.
The government has also managed to complete 11th successful reviews with the International Monetary Fund (IMF), which has further strengthened the confidence of international investors and has placed Pakistan on their radar screen as future investment destination.
Consequently, investments are churning in from domestic and international investors. The country is fast attracting foreign investments to its soil, and garnering applause from international organisations. The World Bank (WB) recently lauded Pakistan for restoring economic stability. "Pakistan has made great progress in restoring macroeconomic stability but much more needs to be done to put Pakistan on a solid, economic growth footing," said Illango Patchamuthu, World Bank Country Director for Pakistan. "Persistent, steady progress on the structural reform agenda will be necessary if Pakistan is to accelerate its growth recovery and lift millions more out of poverty."
In a recent report, the World Bank has identified services and large-scale manufacturing as the key supply side drivers of growth. Services are expected to grow over 5 per cent in FY2016 while large scale manufacturing, benefitting from low global commodity prices, is expected to grow between 4 and 4.5 per cent.
"Fiscal consolidation is one of the most significant reform challenges facing Pakistan today," said Enrique Blanco Armas, World Bank Lead Economist for Pakistan. "The federal government has kept a tight rein on recurrent expenditure, while continuing to invest in Public Sector Development Program expenditure, a very positive development."

Foreign investments

International rating agencies too have taken notice of these latest changes and shown confidence in the economy. Prime agencies such as Moody's, Fitch and S&P have upgraded their ratings for Pakistan to either stable or positive. These ratings are important because it acts as a barometer for international investors; and also bring in cheaper credit.
Bolstered by flashing economic indicators, foreign investors are once again showing interest and eagerness to tap into the large aspirational consumer market of the country.
As per reports in Reuters, carmakers Renault-Nissan are considering a plant in Pakistan, and Suzuki, which already has presence in the country, said it may invest $460 million in a new factory.
FrieslandCampina International Holding, a Dutch dairy cooperative, has recently announced plans to buy stake in Pakistani food giant Engro Foods in a deal estimated at $460 million.

Emerging market

Pakistan Index has been recently upgraded to MSCI's emerging market category from frontier market, which highlights the attractiveness of the economy for foreign investors. The reclassification is expected to change the dynamics of the equity market as many companies are interested to invest in Pakistan's power, energy, oil and gas, automobiles and textile sectors.
The upgrade is expected to generate inflows of global portfolio investment amounting to $475 million by the middle of 2017, according to EFG Hermes, an Egypt-based investment bank.
With increased inflows and vibrancy, Pakistan's benchmark equity index, the KSE 100, reached historical levels this year, clocking as much as 16 per cent returns for investors in a year. The KSE was termed as the best Asia's best performing index, and globally, it is the fifth best-performing stock market. This is in sharp contrast to 2008 when foreign investors fled in anger when the Karachi bourse imposed a floor and trapped them in a collapsing market for almost three months.

China-Pakistan Economic Corridor

The project is a shot in the arm for the country's ailing infrastructure and has the potential to turn Pakistan into a trading hub of 21st century. The CPEC corridor is a highway that will connect from Kashgar in China to Gwadar in Balochistan on the edge of the Arabian Gulf in Pakistan. The $46-billion project is part of the one belt, one road (OBOR) project of China, wherein much of the money is earmarked to instal power stations in Pakistan to ease chronic electricity shortages that hobble businesses and investments.
Of the $46-billion investment, $34 billion will be chanellised into energy sector; and $12 billion in infrastructure projects. "Pakistan has been an FDI-starved country for a host of reasons, but the first 10 months of the current fiscal year saw FDI increase by 5 per cent on a year-on-year basis, to $1 billion, of which 55 per cent came from China alone. In fact, China's contribution to Pakistan's FDI increased 152 per cent over this period. The largest chunk of the FDI, 52 per cent, has gone to the power sector, suggesting that work on CPEC-related infrastructure is underway," says S. Akbar Zaidi, a Political Economist based in Karachi.

Going forward

In the coming years, the $250-billion economy is expected to gush at a faster pace and churn prosperity for its
191.8 million people. But Pakistan shouldn't lose sight of its vision. It needs to make consistent efforts and carry on reforms to ensure that it is not hampered by any external shocks.

- suneeti@khaleejtimes.com