LAHORE - The Pakistan economy has achieved its targets for economic stability under an IMF programme. However, it has fallen behind on growth.

This was stated in a review of the economy for the period July –December 2015-16 released Monday by the Institute for Policy Reforms. The six monthly reviews are a regular IPR publication.

The report stated that the entire focus of policy makers, at present, seem to be on balance of payments and fiscal deficit.

With a substantial provincial surplus, fiscal deficit for the period July-December 2015 was 1.7%. This is well within the target for the year. Revenue collection and expenditure are largely on track. The latter especially because half-year public sector development spending was about one quarter of budget. The rate of inflation too has dropped. For the period July 2015 to February 2016, year on year CPI fell, though it is above the lowest point of September 2015. The fall in inflation stalled because of increase in GST on some items and because the Pakistan Rupee lost value in August and October.

Growth during July-December 2015 has been slow. Against its annual target of 6%, Large Scale Manufacturing grew year on year by 3.9% during July-December 2015. In agriculture, production of cotton and rice, two major crops, fell. This year, cotton lost about a third of its previous year production. Sugarcane production may increase from last year’s low, but will be short of the 68 Million Tons target. Agriculture growth is unlikely to meet GoP’s target of 3.9% for the year.

Investment also may not meet the target set by government, as there may be cuts on development. Credit to the private sector and import of machinery have increased. It is not clear if these are sufficient to boost investment to the desired level.

Power supply, which grew modestly during July-November, continues to constrain economic activity. Overall, IPR subscribes to IMF’s cautious growth estimate of 4.5% for 2015-16 against GoP’s 5.5%.

Balance of payments poses a special challenge. With decline in exports and low FDI, the economy has relied on external debt, sometimes at high cost. Consequently, the burden of debt repayment will increase significantly in the coming years. Exports fell by an alarming 15% during the six months under review. Textiles, our main export, alone fell by 9%. This is partly because of slow growth of the world economy and world trade. However, Pakistan’s exports have suffered also because of the Rupee value and fundamental issues of competitiveness.

The report also emphasized that while it focuses on stability, government must concurrently begin structural reforms of the economy. This is critical if the country is to break out of the low growth trap and continued dependence on external savings. It suggests that for too long policy makers in Pakistan have relied only on management of macroeconomic indicators. It is time for strong action on reforms.

Even within stabilization, they must aim for quantum growth in tax revenues. Successive governments have been unable to persuade important constituencies to pay taxes. Government must reengineer tax policy and administration. Without this, it cannot play its due role in development.

The report counselled government to avoid cuts on development expenditure. It refers to other issues with PSDP. Limited funds available are not wisely spent. Project selection is top down, contracts overpriced, and delivery tardy. Government must take steps to boost business activity. Revival of industry and agriculture need a mix of policy, governance, and public investment support. Access to project finance for the private sector is key.

Other factors hinder sustained economic growth. The report referred to governance, labour productivity, and education as barriers to growth. There is yet no top-level discussion on improving these fundamentals of development.

The report finds that too much hope is placed on CPEC for economic revival. While CPEC will stimulate growth, the economy will not have sustained development without fundamental reforms. CPEC will also increase Pakistan’s external indebtedness. It is very important, therefore, to select CPEC projects judiciously and ensure their effective delivery. CPEC projects must have high economic returns so that the country can pay off the debt incurred. External debt is a deep-rooted issue for Pakistan. It will grow with new projects and concomitant import of inputs such as LNG and coal.