Research and analysis

Pakistan economic update: April 2014

Published 1 May 2014

The State Bank of Pakistan in its latest report forecast GDP growth of 3.5-4.5% for the fiscal year, but sounded caution over agricultural performance. Meanwhile, Finance Minister Dar delivered on two promises: tapping global debt markets and the 3G/4G spectrum auction. While the Eurobond auction generated better-than-expected investor interest, and raised 拢1.2 billion; the much-awaited telecoms licence auction will bring in 拢700 million over the next 5 years 바카라 사이트� close to budget targets, but below expectations. Nevertheless, an improved external position has seen the SBP바카라 사이트檚 reserves climb to a 12-month high. This has sustained the rupee바카라 사이트檚 dramatic rebound last month. While this is seen as an achievement by Dar, the IMF believes that the currency is overvalued. The textile industry agrees. It has said that at current exchange rates, Pakistan바카라 사이트檚 products are uncompetitive in export markets. Meanwhile, the tax authority, struggling to meet the downward revised revenue target, has admitted to withholding taxpayer refunds 바카라 사이트� vindicating businesses바카라 사이트� claims. And with the onset of summer, power cuts could intensify - beyond the currently reported 12-18 hours - as the circular debt piles up again.

1. In its latest report, the State Bank of Pakistan expects growth of between 3.5-4.5% in the current fiscal year. While closer to the 바카라 사이트바카라 사이트檚 estimates, the Bank appears more optimistic than most multilaterals. The SBP바카라 사이트檚 growth projections are based on the strong performance of large-scale manufacturing (LSM) 바카라 사이트� currently at a multi-year high. It believes that the sector will continue to drive growth (despite accounting for just over a tenth of GDP) due to backward and forward linkages with services, particularly retail and wholesale trade. It also expects the telecom industry to perform better than last year. However, it has warned that the main downside risk to its forecast is the worse-than-expected performance of the agricultural sector, particularly the cotton crop. Multilaterals including the IMF and ADB appear more cautious in their growth estimates for the Pakistani economy; although the World Bank expects 4% growth.

2. Meanwhile, the country raised 拢700 million on global debt markets after a hiatus of 7 years. This has seen the Central Bank바카라 사이트檚 reserves climb to a 12-month high. Inflows from the Eurobond issuance (of 5 and 10 year tenors) have helped sustain the rupee바카라 사이트檚 climb on the back of the Saudi 바카라 사이트済ift바카라 사이트� last month. The auction generated better-than-expected investor interest: while the 바카라 사이트 raised 拢1.2 billion, it received offers of 拢3 billion. As the biggest-ever single transaction, it is seen by the 바카라 사이트 as a resounding success. However, some analysts have questioned whether it was worth the price: the sale was priced at 550 basis points above US Treasuries (compared with 325 bps at the last issuance in 2007). Others believe the cost was justified given Pakistan바카라 사이트檚 바카라 사이트榡unk바카라 사이트� credit rating. Instead, they argue that the successful issuance reflects positive sentiment towards the Pakistani market, and in the PML-N바카라 사이트檚 policies, thus far.

3. The much-awaited 3G/4G spectrum auction was held earlier this month. The 바카라 사이트 raised 拢700 million, close to budget target but well below expectations of 拢1.2 billion. Despite a couple of unsold licences, the Finance Minister described it as a success, citing delays under the previous administration. While the sale itself has been welcomed by the business community and public at large, there are concerns. A lack of competition in the auction meant that all licences went to incumbent players, dashing 바카라 사이트 hopes of attracting new entrants. Apart from Zong - the Chinese service provider that secured both, 3G and 4G permits 바카라 사이트� other successful bidders are likely to raise rupee financing from local banks to pay for their fees; potentially with half the payment now, and the rest in equal instalments over 5 years. Analysts believe this could limit new FX inflows under the auction to just 拢310 million.

4. Export-oriented industries are concerned over the rupee바카라 사이트檚 strength. Seen by the IMF as overvalued 바카라 사이트� but considered by the Finance Minister as a key achievement 바카라 사이트� exporters argue that it makes Pakistan바카라 사이트檚 exports uncompetitive in global markets. The textile sector, Pakistan바카라 사이트檚 biggest exporter, is particularly concerned about the rupee바카라 사이트檚 unexpected rebound. The industry바카라 사이트檚 lobbying arm, the All Pakistan Textile Mills Association, believes an overvalued rupee could wipe out any gains from GSP+ status. Worse, they fear losing out to regional competitors in the US market, where Pakistan does not enjoy preferential market access along the lines of the EU바카라 사이트檚 GSP+. Through public appeals to the 바카라 사이트, they claim that the textile industry has faced significant revaluation losses; and could face factory closures and layoffs. To prevent this, they have asked for preferential energy supplies, as well as reimbursement of outstanding sales tax refunds.

5. While tax-revenue collection has appeared promising so far, the tax authority has finally admitted that it is withholding tax refunds. Adjusting for these, the 바카라 사이트바카라 사이트檚 performance on revenue collection is more modest. Responding to the Senate Committee on Finance and Revenue, the Chairman of the Federal Board of Revenue (FBR) conceded that around 拢580 million of refunds due to taxpayers had been withheld. His admission confirms the claims of economists and the business community who appeared sceptical of the FBR바카라 사이트檚 claims of achieving 16% revenue growth over last year; and predicted that the FBR could withhold refunds as it struggles to achieve even the downward revised annual tax-collection target. Adjusting for these, the increase in tax collection compared with last year is closer to 8% - half the 바카라 사이트바카라 사이트檚 16% claims. Furthermore, some commentators believe actual refunds withheld by the FBR are closer to 拢2.7 billion.

6. Now, with the onset of the summer, and a build-up of unpaid electricity bills, power cuts appear set to intensify. Media reports suggest that private power producers have again approached the 바카라 사이트 to clear their dues for the sale of power to the state-owned transmission company. This 바카라 사이트榗ircular debt바카라 사이트� is reported to have reached around 拢1.8 billion 바카라 사이트� widely seen as the threshold between manageable and crippling power outages. Last year, soon after taking office, the PML-N 바카라 사이트 cleared nearly 拢 3 billion in unpaid bills to private power producers. This brought idle generation capacity online, improving power supply and boosting growth. However, stalling recoveries of consumer bills and peak summer demand mean that power outages across the country could get worse.

7. While power shortages hurt industrial activity, a curtailment of gas supplies is equally 바카라 사이트� if not more 바카라 사이트� disruptive. The 바카라 사이트 will continue to face challenges in allocating gas between competing users. The 바카라 사이트 has said that it will ensure gas supply to export-oriented industries. But it must balance this against a variety of other users including households; power plants; and the fertiliser industry. Media reports suggest that so far this year, power plants have received less than half the gas they were promised. This has forced them to operate below capacity, or rely on costly substitutes e.g. diesel. The 바카라 사이트 claims it is working on plans to import LNG. But it is unclear how it will tackle large subsidies on gas consumption in the form of low domestic prices 바카라 사이트� particularly for household users 바카라 사이트� with import prices that are nearly five times higher.

8. In an attempt to capture industrial trends at a higher frequency, one of the country바카라 사이트檚 biggest banks has launched a Purchasing Managers Index. While it points to continued expansion, it reaffirms business concerns over energy supplies. The new index launched by MCB surveys 200 large and small companies across a variety of sectors. Its second reading for the month of March came in at 65.1 바카라 사이트� marginally lower than January바카라 사이트檚 66.5, but above the 50 point threshold that indicates an expansion in economic activity. Separately, a bi-annual business confidence survey run by the Overseas Chambers of Commerce and Industry (OICCI) also declined compared with its last update six months ago. The decline reflects a return of power and gas shortages, which were cited by the business community as their biggest concern. The OICCI claims its survey reflects feedback from a cross-section of businesses representing 80% of the country바카라 사이트檚 GDP, operating across Pakistan.