Pakistan’s economic reform struggles under weak coalition government, says report - Business Guardian
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Pakistan’s economic reform struggles under weak coalition government, says report



The IIF noted that historical precedence, along with a politically weak government, meant that risks were tilted to the downside.

The Washington-based Institute of International Finance (IIF) stated that amidst Pakistan’s staggering economic crisis, the foremost obstacle lies in achieving fiscal consolidation and implementing reforms. This task is compounded by a fragile coalition government and political turbulence fueled by allegations of electoral fraud, as reported by Dawn on Monday. IIF is a global association of financial institutions comprising the world’s largest commercial and investment banks, insurance companies, and investment management firms.

“The biggest challenge will come from fiscal consolidation,” the IIF said, noting that this was an area of particular importance as large fiscal deficits have led to public debt increasing from 55% of GDP in the fiscal year 2009–2010 to 79% in 2022–23. “New estimates now show an overall fiscal deficit of 8.1% of GDP and a primary deficit of 0.2% of GDP,” the IIF said. This coincided with a Ministry of Finance report stating that the seven-month fiscal deficit increased to 2.6% of GDP (PKR 2.721 trillion) from 2.3% of GDP (PKR 1.974 trillion) previous year, although the contained primary expenditures helped in improving the primary surplus to PKR 1.939 trillion from PKR 945 billion last year.

The IIF noted that historical precedence, along with a politically weak government, meant that risks were tilted to the downside. There is a high chance that the PKR 9.4 trillion tax-revenue target will be missed, while further expenditure and significant subsidy cuts will be difficult, the IIF said. The IIF forecasted “a primary deficit of 0.3%. It also highlighted the instability in Pakistani politics and said that Imran Khan’s popularity in the country put him at odds with the powerful military.

“Turbulent, unstable politics will add to the risks facing Pakistan,” the IIF said. Fraught elections characterized by the suspension of cellular service during the elections, a large delay in releasing results, mass protests, a deadly bombing, and failure to allocate reserved seats to PTI-backed independents have exasperated tensions within the country, Dawn reported. “It is clear that Imran Khan is the most popular politician in Pakistan. This puts him at odds with the powerful military,” it said.

The report anticipated that tensions between the two sides would continue to escalate, most likely leading to another round of heavy military crackdowns on PTI-backed politicians and supporters. Added to this is the weak nature of the coalition government. “The PPP seems reluctant to sign on to politically costly reforms. Without their support, it is hard to see a way forward for the PML-N, which could hinder or prolong negotiations with the IMF,” the IIF said. It said the historical precedence did not bode well for either the government or a new IMF program.

“To date, no prime minister [in Pakistan] has ever finished their five-year term, while Pakistan is currently in its 23rd IMF program since 1958. A horrible track record that shows no signs of being broken any time soon,” Dawn observed. “Close to 90 billion dollars in public debt is set to mature in FY24, a large part of which is expected to be rolled over,” the IIF said, Dawn reported. This delicate financing picture makes a new IMF program all the more imperative, especially considering that countries that have previously aided Pakistan with official lending—such as Saudi Arabia, the UAE, and China—are now making financing contingent on an IMF program.

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For equipment upgrades, China eyes fresh $69 bn credit in tech sector



The Hong Kong-based ‘South China Morning Post’ (SCMP) newspaper, China has unveiled a plan to reintroduce two relending mechanisms previously utilized to mitigate the economic effects of Covid-19. The People’s Bank of China (PBOC) will facilitate loans through 21 banks to support small and medium-sized technology firms at an interest rate of 1.75 per cent. These loans can be extended twice, each extension lasting up to one year, as per the report. The move, announced on Sunday, comes amid challenges posed to the Chinese economy by a property crisis and geopolitical tensions with key trading partners. China’s policymakers are aiming to enhance liquidity and bolster confidence in the world’s second-largest economy.

Relending mechanisms these measures will allocate a combined 500 billion yuan (US $69.1 billion) to incentivise loans supporting technological innovation and large-scale equipment upgrades – two sectors that have been explicitly prioritised by the country’s leadership, said the report. The refinancing programme will cover 60 per cent of the principal amount for eligible loans extended to technology-focused small and medium-sized enterprises (SMEs) and can be renewed twice, each time for an additional year.

By the end of last year, the PBOC had 17 active structural support tools with a cumulative outstanding size of 7.5 trillion yuan – equivalent to 16.4 per cent of central bank assets. What are China’s relending programmes? These targeted monetary instruments gained prominence in 2014 when pledged supplementary lending was first utilised to directly provide loans to commercial banks to renovate outdated residential buildings. Among the tools, 13 were introduced as temporary measures during the pandemic to support small businesses, toll roads, private firms, property delivery, logistics, and carbon emissions reduction. Seven of them have already expired.

SCMP said the move has sparked speculation among market participants regarding the extent to which Chinese authorities are willing to implement monetary easing, in light of the US Federal Reserve postponing anticipated interest rate adjustments and the Chinese economy concluding the first quarter of 2024 on a stronger footing. The previous relending mechanism for technology, with a quota of 400 billion yuan (US $55.2 billion), was initiated in April 2022 and has since concluded. Similarly, the earlier equipment renovation program, with a quota of 200 billion yuan (US $27.6 billion), was active from September to December 2022.


This relending programme aligns with Beijing’s guidelines for domestic banks, encouraging them to provide funding for five essential finance categories outlined by President Xi Jinping: technology finance, green finance, inclusive finance, pension finance, and digtal finance.

Furthermore, it corresponds with the objective of large-scale equipment upgrades mentioned during the February meeting of the Central Financial and Economic Affairs Commission. This objective serves dual purposes: Leveraging the country’s substantial fixed-asset investment to stimulate economic growth and advancing its vast manufacturing sector, the Hong Kong-daily said. The relending program and other structural measures aim to aid China amidst ongoing challenges in the property market and fragile investor sentiment.

These hurdles will scrutinize the country’s aspirations to attain a 5 percent economic growth rate this year, as reported by SCMP.

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African economies to grow 3.4 per cent in 2024, says World Bank



The report said increased private consumption and declining inflation were supporting an economic rebound in Sub-Saharan Africa.

The latest Africa’s Pulse report by the World Bank indicates an economic rebound in Sub-Saharan Africa, driven by increased private consumption and decreasing inflation. However, the recovery remains fragile due to uncertain global economic conditions, mounting debt service obligations, frequent natural disasters, and escalating conflict and violence.

The report emphasizes the necessity for transformative policies to address entrenched inequality, ensuring sustained long-term growth and effective poverty reduction. While the region’s growth is expected to rebound from 2.6% in 2023 to 3.4% in 2024 and 3.8% in 2025, the recovery remains precarious. Despite a decline in inflation across most economies to 5.1% in 2024 from a median of 7.1%, it remains elevated compared to pre-COVID-19 levels.

Additionally, while growth of public debt is slowing, more than half of African governments grapple with external liquidity problems and face unsustainable debt burdens. Overall, the report underscores that despite the projected boost in growth, the pace of economic expansion in the region remained below the growth rate of the previous decade (2000-2014) and is insufficient to have a significant effect on poverty reduction. Moreover, due to multiple factors including structural inequality, economic growth reduces poverty in Sub-Saharan Africa less than in other regions.

“Per capita GDP growth of 1 percent is associated with a reduction in the extreme poverty rate of only about 1 percent in the region, compared to 2.5 percent on average in the rest of the world,” said Andrew Dabalen, World Bank Chief Economist for Africa. “In a context of constrained government budgets, faster poverty reduction will not be achieved through fiscal policy alone. It needs to be supported by policies that expand the productive capacity of the private sector to create more and better jobs for all segments of society.”

The World Bank’s Africa’s Pulse report called for several policy actions to foster stronger and more equitable growth. These include restoring macroeconomic stability, promoting inter-generational mobility, supporting market access, and ensuring that fiscal policies do not overburden the poor.

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Expectation of better demand conditions in Q1 FY25 lifts manufacturers’ sentiments



The business expectations index of the survey remains firmly in growth terrain at 127.2 in Q1 of 2024-25.

The Indian manufacturing sector is optimistic on demand conditions in the April-June (Q1) of the new financial year 2024-25, with a strong community of the industry reporting better demand conditions in their assessment of production, order books, capacity utilisation and overall business situation for Q4 (January-March) of FY24.

This is despite expectation that cost pressures from raw materials and salary outgo are likely to persist during April-June 2024. Though respondents expected some moderation in growth of selling prices and profit margins in synchrony with their expectations for demand conditions, according to a recent Reserve Bank of India’s Industrial Outlook Survey of the Manufacturing Sector for Q4 (January-March) of 2023-24.

In all, 1,354 companies responded in this round of the survey, which was conducted during January-March 2024. While there was improvement in employment situation vis-à-vis the previous quarter, input cost pressures increased during Q4 FY24 but the pace of rise in remuneration, however, moderated. Sentiments on overall financial situation and availability of finance remained positive, with some improvement vis-à-vis the previous survey round.

The manufacturers polled lower rise in selling prices and assessed some deterioration in profit margins. The business assessment index for the manufacturing sector increased marginally to 114.2 in Q4 FY 2023-24 from 113.9 in the previous quarter. The business expectations index of the survey remains firmly in growth terrain at 127.2 in Q1 of 2024-25. For the July-September (Q2) of FY2024-25, manufacturers remain optimistic on production, capacity utilisation, order books, employment conditions and overall business situation even as input cost pressures are expected to continue till end-2024 and selling price is anticipated to uphold during Q2 and Q3 of 2024-25.

The RBI’s survey of the quarterly order books, inventories and capacity utilisation (OBICUS), conducted during Q4 FY 2023-24 and covering 813 manufacturing companies shows that at the aggregate level, the capacity utilisation (CU) in the manufacturing sector increased to 74.7 per cent in Q3 FY24 from 74.0 per cent in the previous quarter.

The value of new orders received by the responding companies during Q3 FY24 remained close to that in the previous quarter. On an annual (y-o-y) basis, however, the value of new orders increased by nearly 10 per cent. The finished goods inventory to sales ratio increased marginally in Q3 FY24 from its level in the previous quarter while the raw material inventory to sales ratio remained stable.

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Pakistan to adopt National Fiscal Policy amid bailout talks with IMF, says World Bank



Amid the staggering economic crisis in Pakistan, the World Bank has asked Islamabad to adopt a national fiscal policy by aligning federal and provincial spending with constitutional mandates, merging various federal and provincial revenue agencies into a single general sales tax (GST) collection agency, and effectively taxing agriculture, capital gains, and real estate in the next fiscal year’s budget, Dawn reported on Monday. “Implement the new Fiscal Responsibility and Debt Limitation Acts (FDRLA) at the federal and provincial levels, including through the development and implementation of a national medium-term fiscal framework through the FY25 budget process,” the World Bank asked the government in its latest policy advice.

This is now expected to be made part of the next International Monetary Fund program that Pakistan Finance Minister Muhammad Aurangzeb will be discussing with the lender next week in Washington on the sidelines of the World Bank-IMF spring meetings, Dawn reported. The bank demanded tangible progress on GST harmonisation across the federation and its federating units, “including through the rollout of the GST portal,” and a move towards “rate harmonisation to facilitate tax compliance and the provision of input tax credits.”. On top of this, the World Bank also suggested “consolidation of all GST collection responsibilities with a single agency, which could then distribute revenues in accordance with constitutional provisions” to reduce administrative complexity.

At present, GST is collected by the Federal Board of Revenue, mostly on goods and some services, while similar revenue boards are operating in provinces to collect GST on some services. However, given the overlapping nature of certain services, the stakeholders have been facing GST collection adjustments among the provinces. More importantly, the World Bank wants decisive actions to mobilize revenues from underutilized sources, particularly those relating to the unfinished agenda of the 7th National Finance Commission (NFC) award of 2010: urban immovable property tax, agricultural income tax, and capital gain taxes. While conceding greater federal pool resources to the provinces, it was agreed to effectively bring these areas into the tax net to increase the tax-to-GDP ratio to 15 percent in five years, but the deal (NFC) was drafted in a weak manner.

Dawn reported that the NFC had “recommended that the federal and provincial governments streamline their tax collection systems to reduce leakages and increase their revenue through efforts to improve taxes and achieve a tax-to-GDP ratio of 15 percent by the terminal year 2014–15. Provinces would initiate steps to effectively tax the agriculture and real estate sectors.” However, this has remained a pipe dream over the following 15 years. As for urban immovable property tax, the World Bank has demanded the application of harmonised valuation tables (currently based on rental value) to be updated annually based on observed variables such as inflation, insurance valuation, and sales records, and also to equalize rates between owner-occupiers and rentals.

In this regard, the bank also wants authorities to harmonize and reduce exemptions such as area-based exemptions, owner-occupier exemptions, and non-resident exemptions and to unify federal deemed income tax and urban immovable property tax. For agricultural income tax, the World Bank has asked the government to make the definition of land area consistent, reconsider exemptions based on the size of land holdings, and set common minimum rates based on crop acreage or production estimates. At the same time, the government should also incorporate irrigation and/or construct buildings to differentiate per-hectare minimum rates. Dawn reported that regarding the capital gains tax, the bank has advised the government to unify the treatment of builders, property developers, real estate investment trusts (REITs), and others, simplify the types of taxes related to capital gains and transfers (capital gains tax (CGT), capital value tax (CVT), stamp duty, withholding tax, etc.), remove years-held based differential rates, and simplify the rate structure.

Overall, the World Bank has suggested broader revenue reforms to expand the tax base, improve progressivity, and ease compliance. To achieve this, it wants to close existing corporate and sales tax exemptions, including tax exemptions for real estate, the energy sector, COVID response, and some basic household goods, and instead compensate poor households for negative impacts through enhanced social protection.

To improve tax compliance, the bank has called for addressing constraints delaying the rollout of the track-and-trace system to all sectors and simplifying the tax structure by reforming the “personal income tax (PIT) system to reduce complexity by aligning schemes for salaried and non-salaried workers” and reforming PIT schedules to increase equity by eliminating privileged treatment of specific income sources and by harmonizing rate structures across taxable income sources.

The Planning Commission has already prepared a national planning framework for the upcoming National Economic Council, with the overall theme of ending provincial projects from the federal budget and improving resource deployment through federal and provincial “synergy” in the light of the “true spirit of the constitutional scheme,” including the 7th National Finance Commission Award and 18th constitutional amendment, Dawn reported.

An official said the planning framework would “offer an operational strategy for federal and provincial governments in the context of prevailing constitutional responsibilities and roles for the shared and common objective of development and growth.”. He said the concept of balanced development and regional equity was not only the responsibility of the federal government but equally that of the provinces through their respective development programs, and it was also the essence of the 7th NFC and 18th Amendment.

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RBI calls for enhanced participation of Indian banks in global markets



The Governor of Reserve Bank Shaktikanta Das has called for enhanced participation of Indian banks in global markets, which will growing, is yet quite small, and expressed concern over participation of domestic banks in derivative markets remaining limited with only a small set of active market makers. Domestic banks are dealing with market-makers in global markets rather than with end clients and are yet to emerge as market-makers of note globally, the RBI Governor said Monday at a global conference in Barcelona. These are among the six recommendations of the RBI Governor for the further development of India’s financial markets, which have seen a slew of reforms undertaken by the RBI and aimed at providing a strong bedrock for markets to move to the next trajectory for meeting the growing funding requirements in the economy, providing cost effective hedging options and competing effectively in global markets.

Providing the backdrop to RBI’s market reforms, Das recalled that the onset of the global financial crisis (2008) which altered the way the world looked at financial markets, played out at a time when India’s financial markets were just beginning to develop, buoyed by the needs of a growing economy and in the background of the transition to market-determined interest rates and exchange rates, convertibility in the current account and gradual liberalisation of the capital account. Despite significant institutional and market infrastructure developments like setting up of the Clearing Corporation of India Limited (CCIL) and the operationalization of RTGS, the NDS-OM platform and a trade repository for derivatives, markets remained in the early throes of development.

Bank-intermediated finance was the preferred funding option, diversity in financial products and participants was limited and the approach to foreign participation in domestic markets was guarded. At the same time, the economy’s growing aspirations was placing increasing demands on financial markets while successive global crises necessitated prudent risk management. Das emphasised that it was this context which provided the stage for the RBI’s efforts in recent years to develop the financial markets focused on meeting the needs of a more confident and aspirational economy. Das drive home the the RBI’s reform endeavours which have over the years fostered trust, stability and innovation by making capital raising more efficient, removing segmentation between onshore and offshore markets, expanding the participation base by easing access to markets for hedging and expressing views on market movements, promoting innovation through a larger suite of products and ensuring the integrity and resilience of markets and market infrastructure and ensuring fair conduct by market participants.

“There are, however, some areas which call for attention,” Das said While a lot of progress has been made by banks and other market participants, the six specific areas where more can be done include widening participation of domestic banks in derivative markets. Das suggests that that banks need to do their own due diligence, assess their risk appetite, and then move forward carefully in this direction with focus on enhancing and widening the participation of Indian players in markets for INR derivatives, both domestically and offshore, while being prudent. Another important call for action is that transparency in pricing remains work in progress and more can be done.

Das expressed concern that the retail customer is yet to get a deal at par with large customers which calls for effective marketmaking and finer pricing for smaller deals on NDS-OM. Besides, Das noted that divergence in pricing in FX markets for the small and large customers are wider than what can be justified by operational considerations and banks may need to do more to facilitate the use of the FX Retail platform. He cautioned that banking channels continue to be used by certain persons or entities to fund activities on unauthorised FX trading platforms. This warrants enhanced vigilance by the banks. The other recommendation pertained to bank treasuries which need to scale up their dynamism to utilise the opportunities presented in the context of the recent regulatory reforms.

According to Das, this is very critical for achieving efficient market intermediation, effective management of financial risks and alignment of financial variables across different segments and markets. Das informed that from FY 2024-25, the new prudential framework for investment by banks has come into effect which provide increased flexibility to banks in managing their treasuries and offer scope for increased efficiency, provided banks manage their treasury function actively. The framework of assessment of a bank’s treasury should take into account risks arising out of action and risks arising out of inaction i.e., missed opportunities. Das suggests appropriate safeguards be put in place to address the new challenges posed by new products, participants and markets.

For example, as sophisticated OTC derivative products are introduced, they must be accompanied by adoption of certain safeguards, both by the market-makers as well as customers. As Indian markets get integrated with global markets and non-resident participation increases, transmission channels from global developments will become stronger and speedier and this, Das observes, will require greater watchfulness and proactive management of the associated risks by market participants even as the opportunities are grabbed. Das concluded by highlighting the strong foundation laid down by RBI through development of the financial markets in a manner that can continue to meet the needs of a growing and globally connected economy while fostering trust, stability and innovation.

Moreover, according to the RBI Governor, financial markets has been sought to be promoted through market reforms which have focused on ensuring fair market conduct by preventing market abuse, fair customer conduct through robust market-marking regulations and ensuring price transparency and enhanced disclosures by market participants. Das underlined that achievement of desired outcomes will be contingent on financial institutions and market participants taking forward the reform agenda so that India has vibrant and internationally competitive financial markets. Das set collaboration to usher in the next generation reforms to place India at a position it rightly deserves as the agenda for the next decade coinciding with 100 years of RBI.

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Modest growth of 3.14 % in retail sales, PVs dip 6 %, 2W & 3Wsoar: FADA



In FY24, auto retail sales saw sector-wide growth, leading to a 10 per cent yoy growth, with the 2W segment registering growth rate of 9 per cent, 3W segment growing by 49 per cent, PVs by 8.45 per cent, tractors by 8 per cent and commercial vehicles by 5 per cent respectively.

Despite election uncertainties, economic concerns and intense competition, the two wheeler and 3W segments showcased positive sentiment in March retail sales, especially in the premium and EV segments even as the Indian auto retail sector posted a modest growth of 3.14 per cent yoy in March 2024, with passenger vehicles sales showing a decline of 6 per cent, tractors showing a decline of 3 per cent and commercial vehicles facing a slump of 6 per cent respectively. However, in FY24, auto retail sales saw sector-wide growth, leading to a 10 per cent yoy growth, with the 2W segment registering growth rate of 9 per cent, 3W segment growing by 49 per cent, PVs by 8.45 per cent, tractors by 8 per cent and commercial vehicles by 5 per cent respectively, the Federation of Automobile Dealers Associations (FADA) said on Monday.

Heading into FY’25, FADA projects growth amidst a mix of optimism and challenges. The vehicle retail data of FADA for March’24 and FY’24 shows a surge in electric vehicle sales amidst expiration of the FAME 2 subsidy on 31 March with the 2W electric vehicles share jumping to 9.12 per cent for the first time. There was positive sentiment in 3W segment which demonstrated growth driven by the increasing acceptance of EVs, showing an optimistic trend despite potential challenges from election uncertainties and policy changes. Manish Raj Singhania, notes that the 2W segment demonstrated resilience and adaptability, with EV sales surging due to the expiration of the FAME 2 subsidy on March 31st. “This led to a notable boost in the 2W-EV market share to 9.12 per cent. “Positive market sentiment was supported by seasonal events, improved vehicle supply, and financial incentives. Despite facing market volatility and intense competition, the industry is strategically evolving, particularly in the premium and EV categories, signalling a bright future.” said Singhania.

In FY24, auto retail sales saw sector-wide growth, leading to a 10 per cent yoy growth, with the 2W segment registering growth rate of 9 per cent, 3W segment growing by 49 per cent, PVs by 8.45 per cent, tractors by 8 per cent and commercial vehicles by 5 per cent respectively. The 2W segment benefited by enhanced model availability, the introduction of new products and a positive market sentiment, alongside the burgeoning EV market and strategic premium segment launches. The growth in the 3W segment was driven by the introduction of cost-effective CNG fuel options, new EV models, expanding city landscapes, demand in last mile mobility in urban centres resulting in strong demand, marking a new industry benchmark. The PV segment’s growth was propelled by improved vehicle availability, a compelling model mix and significant contributions from the SUV segment, which now claims 50 per cent market share.

The auto is projecting an optimistic outlook in FY’25, focusing on new product launches, especially in EVs and leveraging economic growth, favourable government policies and expectation of good monsoon to fuel demand, despite facing challenges like competition and the need for strategic market engagement. The 3W segment showed an encouraging sales trend hitting an all-time high retail, driven by the growing acceptance of EVs. The introduction of EV autos and loaders positively impacted the retail environment. Although faced with election-related uncertainties and concerns over policy changes, such as free bus travel for women, the overall outlook for the sector remains upbeat, supported by the quality of vehicles and strong market demand.

The PV sector encountered challenges, with a m-o-m decrease of 2 per cent and a yoy fall of 6 per cent The downturn was influenced by heavy discounting and selective financing further affected by economic worries and the electoral climate. Nonetheless, positives such as improved vehicle availability, increased stock levels and new model launches did stimulate demand in certain areas. The impact of election activities and changes in festival dates also played a role in sales dynamics. The near-term outlook of FADA notes concern over decline in consumer sentiment among urban Indians and warns that the automotive sector faces a nuanced challenge. Given the continued inflationary trend without any relief in finance rates, these prospective buyers may continue to hesitate. Heading into FY’25, the auto industry is poised for growth amidst a mix of optimism and challenges.

The excitement around new product launches, particularly electric vehicles, sets a forward-looking tone. Manufacturers are gearing up with better supply chains and an array of models to meet diverse consumer demands. Economic growth, favourable government policies and an anticipated good monsoon are expected to fuel demand, especially in rural areas and the commercial vehicle sector, which is closely linked to infrastructure projects and economic activity.

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