2017 in review: Dirty politics trumped development

economics this year

The year 2017 started on a positive note. Economy was growing, inflation was low, the rupee
was stable, CPEC was progressing, Pakistan’s credit rating had improved, and the stock market
was racing. There was hope for better times.

But then, things took a turn.

Political chaos hit the economy, and hit it hard. The chaos gained momentum with the formation
of the Panama case JIT in April and then culminated with the Islamabad sit-in by a faction of the
religious right in November.

The prolonged chaos changed the once hopeful sentiment. The economic narrative shifted to
fiscal deficit, trade deficit, rising debt, setbacks for CPEC, an overvalued rupee, and a sliding
stock market. Pessimism sidelined hope.

Let’s look back at the highlights of 2017.

Regaining economic growth momentum

The Economic Survey put the GDP growth for 2016-17 at 5.3pc, noting that it is the “highest
growth rate recorded in a decade.” The World Bank in its Pakistan Development Update said:
“Pakistan's economic performance remained robust during the fiscal year 2017 (FY17) as growth
continued to accelerate.”

IMF’s Article IV Consultation had a similar view: “Pakistan’s outlook for economic growth is
favourable, with real GDP estimated at 5.3pc in FY 2016/17 and strengthening to 6pc.”

The State Bank of Pakistan’s (SBP) State of the Economy also agreed: “The real GDP growth in
FY17 was the highest during the last ten years. It was led by a rebound in agriculture and a
broad-based increase in value addition by services sector.”

Inflation in low single digit

Inflation, a tax we all pay, is perhaps the most significant economic statistic for ordinary
Pakistanis. It remained at around 4pc. This is according to the Consumer Price Index by
Pakistan Bureau of Statistics (PBS), if you are willing to believe the Bureau.

That surely does not mean that the price level of essential goods is within the reach of common
Pakistanis. What it means is that these essentials did not move much further out of their reach.

Inflation was contained thanks to factors like lower international petroleum prices, which have
begun to rise, and a stable Pakistani rupee, which has started to weaken. However, according
SBP, in 2017-18, “overall inflation is expected to remain well below the target of 6pc.”

Population hits 207.77 million

Pakistan's population has officially hit 207.77 million. This is the provisional result of the 2017
census data by the PBS. The data has been collected after nearly two decades and it has not
been without controversy.

The compound annual growth rate for the population since 1998 turns out to be 2.4pc, well
above the global average. Female population is 101.3 million or 48.76pc.

The share of population of Punjab and Sindh decreased while that of Khyber Pakhtunkhwa
and Balochistan has increased.

According to the Word Bank, Pakistan is the sixth most populous country following China,
India, USA, Indonesia and Brazil.

Policy rate maintained at 5.75pc

SBP kept the policy interest rate at 5.75pc, where it has been since May 2016. Credit to the
private sector grew on a year-over-year basis in 2017-18 by 18.5pc.

Official unemployment at 6pc

Another statistic that is close to the hearts and minds of Pakistanis is the unemployment
rate. Officially, it is around 6pc but not everyone is willing to believe it.

The credibility of economic data in Pakistan in general has long been subject to debate. But the
unemployment number stands out because of the incredulity surrounding it.

The army of applicants applying for every advertised job in 2017 surely does not suggest
unemployment is low. In one of its report, marketing research firm Nielsen puts
the employment rate at 51pc, leaving the unemployment rate much higher.

Government weakens, key offices change hands

Economic issues took a back seat for most of the year as the leadership got occupied with the
ongoing political turmoil. The government was greatly weakened and its fragile writ was fully
exposed in the Islamabad sit-in.

Following the disqualification and resignation of prime minister Nawaz Sharif, the embattled
finance minister Ishaq Dar has taken leave of absence.

The office of secretary finance and chairman of FBR changed incumbents. A new governor
assumed office at SBP, and an acting chairman was appointed at Securities and Exchange
Commission Pakistan (SECP) after the former chairman was suspended in the “record
tampering” case.

It has been a surreal experience watching all the key policy makers get replaced in a matter of
months. The economic challenges were mounting, the economic leadership was conspicuous by
its absence, and no one was counting the cost of political uncertainty.
CPEC dominates economic discourse
There are great expectations from CPEC and they keep becoming greater. The seventh round of
the CPEC Joint Cooperation Council took place in Islamabad in November.

According to the official announcements regarding the long-term plan, “By 2025, the CPEC
building shall be basically done, the industrial system approximately complete, major
economic functions brought into play in a holistic way, the people’s livelihood along the CPEC
significantly improved, regional development more balanced and all the goals of Vision
2025 achieved.”

The largest sector under CPEC is energy, where shortages have long been the bane of our
economy. The government is now examining a proposal to replace the US dollar with the
Chinese yuan for trade between China and Pakistan.

All, however, is not reported to be well with CPEC. There have been news items about potential
setbacks with calls for greater transparency.

Remittances could be slowing down

Remittances, recorded at $19.3 billion during the last fiscal year, have
long helped manage Pakistan’s trade deficit. Unsurprisingly, of the total global remittances, 80pc
are received by 23 countries, led by China, India, the Philippines, Mexico and Pakistan.

The World Bank’s Migration and Development Brief says that Pakistan had witnessed 12pc
growth in remittances in 2015, which moderated to about 2.8pc in 2016 and is expected to grow
by a meagre 1.4pc in 2017.

SBP’s forecast for remittances for the current fiscal year is between $19 and $20 billion.

Terror and political violence remain alive

Unlike some of the traditional economic indicators, such as inflation and unemployment, terror
and political violence are not systematically measured and publicised in Pakistan. This is quite
puzzling given that they have an unusually strong link to our economy.

A report published in 2017 by the US State Department says that terror in Pakistan is on the
decline. A publicly available data set says that fatalities from terror incidents were 1209 in 2017,
down from 1803 in 2016.

While terrorism is receding, Islamabad is hurting economic activity.

Budget offers little good news for financial markets

PML-N's government unveiled its fifth bugdet of Rs4.5 trillion, allocating

 Rs1 trillion to development projects

 Rs920 billion to defence spending.
 The budget offered little good news for financial markets.
  The tax rate on capital gains on securities was increased to a flat 15pc for filers and
20pc for non-filers regardless of holding period.
 A super tax of 4pc for banking companies and 3pc for persons other than banking
companies earning more than Rs500 million was extended to 2017-18.

If critics are to be believed, the government is now set to miss all the major budget
targets including the GDP growth of 6pc, containing budget deficit of 4.1pc, and increasing tax- -
to-GDP ratio of 13.7pc.

Pakistan reenters MSCI (formerly Morgan Stanley

Capital International) emerging market index
Pakistan’s stock market soared because large inflows by foreign funds were expected after the
country regained entry into the MSCI Emerging Market Index.

Chinese acquire strategic stake in PSX

In a leap forward for PSX, its stock brokers sold 40pc of their shares for US $85 million to a
consortium of Chinese securities exchanges, Pak-China Investment Company, and Habib Bank
Limited.

HBL’s scandal shakes the banking sector

HBL, one of the largest banks in Pakistan, was rocked by a money laundering scandal that shook
the entire banking sector. The Department of Financial Services of New York State alleged that
HBL had committed 53 separate violations between 2007 and 2017.

While details about the wrong doings remained sketchy, HBL agreed to pay a fine of $225
million. It is a huge amount, but still less than half the $630 million that the US authorities had
reportedly assessed.

Companies Act 2017 promulgated

The Companies Act 2017 was promulgated in May replacing the Companies Ordinance, 1984. A
feather in SECP’s cap, this is the longest piece of legislation ever approved by Pakistan’s
parliament.

 This was a mega project many years in the making.

 The new act focuses on abolishing unnecessary requirements and benefitting from the use
of technology.
 Among its many features are mandatory minimum quotas for women directors
and persons with disabilities. This act will continue to touch each of the roughly 80,000
companies registered in Pakistan and the lives of millions of Pakistanis for many years to
come.

Deficits and debt stoke fears

The fiscal and trade deficits have been mounting. As one news report in September put it, fiscal
deficit hit 5.8pc of GDP reaching “Rs1.864 trillion mark in absolute terms, the highest
 “Never before in the country’s history have imports been over two-and-a-half times of
exports as they are now,” lamented an observer, as trade balance worsened. The ratio of gross
public debt to GDP, as reported by the SBP, remained above 60pc.

There has been ongoing speculation as to whether Pakistan would return to borrowing from IMF
and face the painful adjustments. The government sought to buy time by raising

 $1 billion through sukuk

 $1.5 billion via eurobond

Rupee depreciates and remains under pressure

But early in December, “the State Bank launched what appeared to the rest of us like an ambush”
and the rupee, that opened at 105.5 against the dollar, quickly hit 109.5, and has remained
volatile since. Devaluation is not without consequences but it is uncertain by how much it will
fuel inflation.

Water crisis bubbling under

While most of the economic focus is on our twin deficits, a major challenge that is bubbling
under is water stress. There were a series of disturbing reports on the water situation in
Pakistan. According to WaterAid, “Pakistan is among the world’s 36 most water-stressed
countries” and “among the top 10 countries with the greatest number of people living without
access to safe water.”

As per the Pakistan Council of Research in Water Resources, Pakistan may run dry by 2025 if
the present conditions continue. In another report by Institute of Public Policy, there are five
challenges on the supply side: water scarcity resulting from higher demand and diminishing
capacity of reservoirs, excessive conveyance losses, deteriorating infrastructure, high operation
costs and an excessive groundwater use.

The Supreme Court called upon the chief ministers of Sindh and Punjab expressing concern over
the lack of availability of potable water.

Cyber crime makes its presence felt

ATM skimming hit the headlines towards the end of the year. HBL confirmed that Rs10.2
million had been stolen from 559 accounts. The scandal was far from huge.

We are talking about less than 1,000 people and just about Rs1 crore in the whole country. But
the media outcry it generated was indeed huge.

On the bright side, the media outcry created more awareness about cyber crime than the National
Response Centre for Cyber Crime under the FIA could ever expect to achieve through its
awareness activities.

In sum, politics trumps economics in 2017

Looking back, 2017 started off looking bright, but then turned into a dark year for Pakistan’s
economy. This unwanted twist was not caused by bad luck or a natural disaster.
It was very much the making of powerful Pakistanis eager to play
a game of thrones.
They put their ambition, their ego, and the glory of their institution above that of Pakistan.
None of them came out a winner.

Be it any party or the parliament, the judiciary, the army, or the media, all have suffered
reputational damage during 2017. But there has been one clear loser: Pakistan.

Dirty politics trumped development economics in 2017. It could have been a much better year
for Pakistan’s economy, but it was not.