Opportunities and risks for economy

Pakistan sees no immediate need for a foreign financial bailout as the nation is facing headwinds on its external front. The fundamental challenge being faced by South Asia's second largest economy today is a widening current account deficit caused primarily by the nation's rising imports and subdued exports, said participants at the recent Bloomberg Pakistan Economic Forum held in Karachi.
Foreigners are net sellers, year-to-date (YTD)
Pakistan assets have lagged behind its emerging market peers in foreign flows, as economists expect Pakistan to seek, next year if not by the end of 2017, a fresh bailout package to finance its current account deficit. This has widened to $3.55 billion during the first quarter of current fiscal year, which ended in September.
The State Bank data shows that FY17's deficit has gone beyond $12 billion or 4.1% of GDP compared with $4.86 billion a year ago. Standard Chartered Bank has projected that this gap would increase 5.3% by the end of this fiscal year, although Pakistan has hired banks for a possible Sukuk and conventional bond issuance of up to $2 billion.
Stable outlook
Despite this, State Bank of Pakistan Deputy Governor Jameel Ahmad said: "The overall macroeconomic picture is positive, and the outlook remains encouraging." In fact, Standard & Poor's (S&P) recently affirmed Pakistan's "B/B" sovereign credit rating.
Pakistan, Ahmad said, is cognizant of the emerging risks in its balance of payments and is taking various measures to increase exports and decrease imports.
The country's trade gap increased to more than 36% last year. Officials in Islamabad attribute this 4.1% deficit to the country's increased "productive imports" of machinery and other equipment needed for the completion of China Pakistan Economic Corridor (CPEC) project.
Pakistan is pinning hope for its growth prospects in the Chinese-funded $55 billion corridor project which, the deputy governor said, was giving manufacturing boost to local construction, transport, steel and chemicals industries. This is reflected in Pakistan's large scale manufacturing which grew 11.3% during the first quarter.
Exports fall bottomed out
"The decline in exports has bottomed out," he said as Pakistan Bureau of Statistics has recorded 10.8% growth in the country's exports during the first three months of FY18, ranging from July to June.
With exporters benefiting from a 180 billion rupees package, the government of Prime Minister Shahid Khaqan Abbasi recently imposed a regulatory duty on what the deputy governor said was 731 non-essential import items to help cut the trade deficit.
Pakistan last month borrowed $450 million from Swiss financier Credit Suisse, and is planning to issue conventional and Islamic bonds for international investment to raise finances for external account stability.
Structural problems
Industry stakeholders, however, pointed out certain structural issues which they said were keeping Pakistan's growing economy from performing up to its real potential.
Some of these include the longstanding circular debt (ie the default of various public and private sector users on fuel related dues) issue in the energy sector, reforming the country's regulatory and tax collecting institutions such as the Securities and Exchange Commission of Pakistan and the Federal Board of Revenue as well as broadening of the tax base.
Pakistan has one of the lowest tax-to-GDP ratios in the world as less than one percent of more than 200 million Pakistanis pay taxes.
"Just improving the competitiveness of our exporters using monetary policy is clearly not the answer," said panelist Ghias Khan, Chief Executive Officer of Engro Corporation, a leading business conglomerate of Pakistan. In its last monetary policy committee meeting in September, Pakistan's central bank has kept the interest rate intact at 5.75% since May last year.
Inadequate energy supplies
Syed Wamiq Bukhari, Chief Executive Officer of Pakistan Petroleum Limited, said the economy was not getting enough energy supplies to grow in accordance with its real potential.
Wamiq believes that Pakistan's energy consumption assessment is incorrect and he believes whatever energy Pakistan would be producing in the next few years would be absorbed by the industry instantly. "If you produce quadruple of what you are producing today, this economy will still absorb it", said Wamiq.
In a Twitter post in September, former power minister Khawaja Muhammad Asif said Pakistan had achieved the capacity to generate 20,000 megawatts of electricity to cater to 18,203 megawatts of demand. Pakistan with a population of about 210 million is producing 25,000 megawatts of power compared with 130,000 megawatts of Brazil, a developing country of the same size.
Rising demand
Lucky Cement Chief Executive Muhammad Ali Tabba said Pakistan could even achieve up to 7.5% economic growth given the country's rising domestic demand. "From auto to steel to cement to FMCGs, you know, there is double digit growth everywhere," he said.
One thing is clear. Pakistan's economy is set to take off post CPEC as several local industries are looking at the opportunities to increase their output. With the low inflation and lowest interest rate in the country, Pakistani economy seems out of dark clouds.