According to the report, for the last two years Pakistan's 'exports have been in free-fall'. Exports declined in a broad range of sectors. The report calls for a proactive and concerted effort to arrest the trend. This is critical to improve long term fundamentals of the economy and to reduce Pakistan's external vulnerability.
"Our exports must reduce dependence on textiles and apparels and, more importantly, change the strategy from competing on price to product differentiation. Production declined in a number of major industries including textiles. The economy's fundamentals remain uncertain and there is no indication of increase in productivity. In a period of low mark-up in the country, government of Pakistan has increased short-term debt while reducing long-term borrowing," Report said.
The report also said that higher imports to improve power supply and for servicing of external debt have increased the economy's forex needs. Exports declined eight percent in 2014-15, a further 12.5 percent in 2015-16, and again by nine percent in the quarter under review.
Agriculture production has improved after last year's dismal performance. Production of cotton grew by 18 percent. It fell by 30 percent last year. Other major crops have recovered. However, against the target growth rate of 5.9 percent for 2016-17, year-on year Large Scale Manufacturing (LSM) grew by 2.3 percent for the first quarter. During the quarter, the amount of private credit decreased compared to last year.
The report reveals that first quarter results show worsening of both fiscal and current account deficits. Fiscal deficit was 1.3 percent of GDP for the quarter against a target of 3.8 percent for the year. Current account deficit was 1.1 percent, while the year's target is 1.5 percent of GDP.
FBR tax collection and federal government revenue grew by four percent and three percent respectively. This is on top of the unprecedented increase of 20% during 2016-17. On the other hand, expenditures have remained within proportionate budget. In fact, development spending is lower than the first quarter last year. The report states that quick fixes will not help with the growing twin deficits and signs of medium term external vulnerability. They require structural reforms through major policy changes. Without much needed reforms, the economy will continue to perform within a band of low to moderate growth. Public debt will continue to rise as revenues stay well behind needs. Export growth too will remain uncertain.
The report also said that China Pakistan Economic Corridor (CPEC) is one of the major factor which will increase productivity. However, there is need for urgent action to upgrade skills, improve R&D as well as governance. Reducing the social deficit will provide better workers for the factory floors, in offices, and better entrepreneurs. By not doing so, Pakistan has missed out on a large part of its potential. It will also reduce poverty in the country.
"Import of power generation machinery has increased greatly. In 2015-16, Pakistan imported power generation machinery worth USD 1.8 billion. Since then, the country has imported an additional USD 795 million worth of machinery imported during the first quarter. Pakistan is expected to approach target of increasing power generation by about 13,000MW by 2018 to 2020, including 10,700MW under CPEC. Figures for import of other machinery show overall revival in industry. These imports are apparently financed by debt as FDI is still low. However, for sustained growth, the economy will need more than just machinery imports," report said.
The report further said that development expenditure remained encumbered in the deeper issues of project selection, transparent procurement, and effective project management. Improvement is needed in these areas to maximise returns to the economy. Also, public investment is well below needs.
Savings and investment remain modest. Last year, their ratio to GDP was well below target level. While targets for the current fiscal year too are the same, there is no new policy in place to achieve them. Government must lead a concerted effort to reduce its negative savings. Also, last year, private investment fell from 10.2 percent of GDP in 2014-15 to 9.8 percent in 2015-16.
"Sustained growth will depend on improved performance of commodity producing sector, agriculture and industry. Within this, power supply and manufacturing are of special importance. Growth of four percent in year on year power supply is lower than GDP growth rate. However, this is likely to improve soon," report concluded.