Pakistan’s economy again at crossroads

KARACHI: Pakistan’s economy is again at crossroads mainly due to its inconsistent economic policies and weak implementation of structural reforms. This is evident from the Budget FY22, by way of which the fiscal policy became expansionary and several key EFF commitments were reversed to spur growth; which also included low petroleum development levy (PDL) and general sales tax (GST) on fuels, reinstatement of zero-rated GST, omission of personal income tax (PIT) and GST policy reforms and the introduction of new-referential tax treatments for the technology, automobile sectors and other export-oriented industries.

Pakistan met most of the performance criteria, indicative targets and structural benchmarks. These included Treasury Single Account (TSA-1) implementation, energy tariff hike, IPP payments and further tax amnesty avoidance.

Three structural benchmarks remain outstanding, including strengthening of AML/CFT to overcome FATF, amendment of the Ogra Act to support regular and full cost recovery and establish a robust declaration system with a focus on high-level public officials.

The International Monetary Fund (IMF) has now added six new structural benchmarks, which are extremely vital for the remaining course of the Extended Fund Facility (EFF) programme. Albeit, Pakistan’s economic recovery has gained hold with the fund projecting a growth of 4 per cent for FY22.

With an assumption of an entrenched policy actions and reforms, the GDP growth is forecasted to reach a medium-term potential of 5 per cent.

However, the IMF expects inflation to be transitory owing to recent terms-of-trade shocks, energy price adjustments, as well as GST reforms being proposed.

An entrenched stability of macros and overall debt profile warrants action in five policy areas, including fiscal discipline, monetary setting to anchor inflation, external buffers through market-based exchange rate, financial viability of the energy sector and structural reforms to overcome deficiencies in AML/CFT as well as state-owned enterprises (SOEs) governance.

Some of the key policy measures being proposed by the IMF can likely to increase the working capital costs for exporters, mainly textiles.

Showing concerns for the financial stability, the IMF has urged the State Bank of Pakistan (SBP) to roll back the measures such as 5 per cent mandatory domestic lending targets of banks towards construction and lowering of applicable risk weight to 100 per cent from 200 per cent for the banks’ lending in REITs.

Stronger emphasis has to be laid on addressing structural deficiencies, in particular, mortgage and housing finance.

The authorities will establish a working group to produce a strategy paper by February 2022. Such a move may be positive for the long-run but it can put a plug on the near-term triggers in the construction space, more specifically a negative for cement, steel, glass and other allied industries.

Wajid Rizvi is a research analyst who possesses a blend of both sell-side and buy-side (commercial bank) equity research of Pakistan equities. He possess a diverse skill set in equity valuation and financial modelling.