Government targets 7 percent GDP growth till 2015

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KARACHI: The federal government projected to accelerate to 7.0 percent gross domestic product (GDP) growth within three years, compared with only 3.0 percent in the last five years of Pakistan Peopleís Party Parliamentarians (PPPP) tenure.

The Pakistan Muslim League-Nawaz (PML-N) won the election on a pro-growth manifesto aiming to revive the economy via large infrastructure spending. The first PML-N budget targets growth of 4.4 percent in fiscal year 2013-14, versus 3.6 percent in fiscal year 2012-13.

According to Senior Economist at Standard Chartered Bank Pakistan Sayem Ali, the PML-Nís medium-term plan targets raising the investment-to-GDP ratio to 20 percent by fiscal year 2017-18 from 12.6 percent in fiscal year 2012-13. The growth strategy is focused on large infrastructure investments, including power projects, motorways, ports and urban transport projects.

He said the investment spending is targeted to rise to Rs 1.15 trillion (4.5 percent of GDP) in fiscal year 2013-14, up almost 35 percent from Rs 850 billion (3.7 percent of GDP) in fiscal year 2012-13.

The bulk of this spending is earmarked for large power-sector projects (Rs 225 billion), water-sector projects (Rs 59 billion) and trade infrastructure, including roads and ports (Rs 110 billion). The power crisis is the binding constraint on Pakistanís growth.

According to the government, the power crisis costs an estimated 2.5 percent of GDP annually due to industrial and business shutdowns. The PML-Nís strategy is to eliminate circular debt by reducing power theft and rationalising subsidies.

It has also outlined an ambitious goal of more than $20 billion of power-sector investment over the next five years to create additional generating capacity of 10,000 megawatts, the economist said in his report. The other focus of investment spending is to develop trade infrastructure to link the Gwadar Seaport with China and Central Asia. Pakistan sees a huge opportunity to increase transit trade by linking the port to the rapidly developing eastern Chinese province of Xinjiang.

The fiscal year 2013-14 budget allocates resources to build a motorway linking Gwadar to neighbouring China. Similarly, the governmentís strategy focuses on developing trade corridors linking India to the Central Asian States, the report added.

A step closer to obtaining a new IMF loan: Ali said in his report that external debt payments scheduled for fiscal year 2013-14 total $5.8 billion (2.5 percent of GDP), including almost $3 billion to the IMF.

Official foreign exchange reserves declined to $6.3 billion by end-May 2013 (equivalent to 1.8 months of import cover) from $9 billion at end-2012. Given pressure on foreign exchange reserves and large external debt payments, the government is in consultation with the IMF for a new three-year $5 billion Extended Fund Facility (EFF). However, the IMF staff requested in January 2013 that the government implement Ďpriorí actions in order to fast-track the request for a new loan facility, he said.

The actions outlined by the IMF staff include measures to reduce the fiscal deficit by 3.0 percentage points of GDP over three years. The fiscal year 2013-14 budget addresses this.

Despite a significant increase in investment spending, the budget targets a lower deficit of 6.3 percent of GDP, down from 8.8 percent in fiscal year 2012-13. The 2.5 percentage pointsí reduction comes primarily from lower subsidies and tax measures.

The subsidy bill is projected to decline by 35 percent in fiscal year 2013-14 to 0.9 percent of GDP, versus 1.6 percent of GDP in fiscal year 2011-12. This should be achieved primarily via the energy sector, where power tariffs are likely to be raised by 20 percent in fiscal year 2013-14. The budget includes measures to raise the tax-to-GDP ratio to 10 percent, an increase of nearly 22 percent from 9.3 percent in fiscal year 2012-13.

Key measures include raising the general sales tax rate to 17 percent from 16 percent, and increasing income tax on salaried employees. The income tax rate for the highest earners (Rs 7 million per annum and above) has been increased to 30 percent from 20 percent. Withholding tax (an advance tax adjusted against income tax paid) has also been levied on commercial importers, contractors, suppliers and service providers.

IMF staff visited Pakistan from June 19-26. They endorsed the measures outlined in the budget, and a breakthrough in negotiations seems likely. There is a strong possibility that the IMF, in partnership with other multilateral agencies, will offer a $9 billion loan to Pakistan, of this, $5 billion will come from the IMF. This is positive for markets, which are concerned about the outlook for the Pakistani rupee due to declining foreign exchange reserves and large external debt payments due over the next year. The government has budgeted $1.1 billion in programme loans for fiscal year 2013-14, up from just $74 million in fiscal year 2012-13. The dollar may go up Rs 105 at end of 2013, the economist added.

Courtesy: † Daily Times

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