Boston, MA -- (ReleaseWire) -- 02/18/2014 -- Pakistan's long-overdue privatisation drive looks set to finally commence, with the partial sale of Pakistan International Airlines (PIA) likely the first target. Large-scale losses at PIA and other public sector enterprises is estimated to equate to roughly 15% of total fiscal revenues, and eliminating these losses would go a long way towards closing Pakistan's budget deficit.
With strong growth in the manufacturing and service sectors, Pakistan's economy posted impressive real GDP growth of 5.0% y-o-y in the July-September period. While we expect growth to slow over the remainder of the fiscal year, there are reasons for optimism as reforms are steadily undertaken and private sector crowding out is reduced, which should see growth accelerate to 4.0% in FY2014/15, from an expected 3.4% in FY2013/14.
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Pakistan's foreign reserves are running critically low, at just 1.3 months of import cover, and negative in net terms. Rupee weakness is highly likely as the State Bank of Pakistan resorts to allowing gradual depreciation in order to support reserves. This, together with progress on structural reforms to narrow the current account deficit, should see reserves begin to rise over the coming quarters.
The Pakistani government's reliance on debt monetisation to cover its revenue shortfall continues to undermine private sector investment while keeping inflation elevated. With the support of the IMF, structural reforms aimed at broadening the tax base look set to go some way towards increasing tax revenues as a share of GDP, reducing the deficit, and reducing the fiscal burden on the private sector.
Major Forecast Changes
W e have downgraded our FY2013/14 real and FY2014/15 exchange rate forecasts. We now expect to see more rapid depreciation as the central bank seeks to build up its perilous reserve position. We are forecasting the unit to end the current fiscal year at PKR107.8/ US$, and the next fiscal year at PKR112.2/US$.
By the same token we have increased our FY2013/14 reverse repo rate forecast from 10.00% to 10.50% previously.
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