LAHORE - Energy crisis and declining exports remained the key risks faced by economy during 2015.

Energy shortages are a major detrimental towards manufacturing and economic growth. According to experts, implementation of power projects under CPEC and privatization of electricity distribution companies will remain the key. Declining exports to world economies specifically to China (10 percent of exports goes to China) present a big risk to the country, which needs to be addressed through export led policies, they added.

As the first half of the current fiscal year is closing Thursday, experts have observed that decline in exports remains key impediment to external account sustainability. During 6MFY16, exports declined by 10.7 percent to $8.8b due to reduction in commodity prices and slowdown in global economies. This follows a reduction in exports of 4 percent to $24b during FY15. However, reduced imports and improved remittances more than make up reduction in the country’s exports.

Foreign direct investment (FDI) dropped to $850m in FY15, down 50 percent compared to previous year and significantly lower than high of $5b in FY08. However, during 5MFY16 period, FDI posted growth of 8.6 percent to $540m. Moreover, during Nov 2015 alone, FDI more than tripled to $157m on the back of higher investment from China. Chinese investment along the lines of China Pakistan Economic Corridor (CPEC) and improving security situation could be game changers for investment in Pakistan. China has pledged to invest $46bn in Pakistan in various power and infrastructure projects, which is the largest Chinese investment in any one country. This will help Pakistan address infrastructural and energy sector issues. This could also be a growth driver for other investments coming into Pakistan.

Pakistan has been receiving $2b annually under the IMF’s Extended Fund Facility (EFF) program, which is scheduled to end in Sep 2016. Experts do not see this as a major risk as reserves are at comfortable level (import cover of 5.5 month). Likelihood of entry into another IMF program is low if oil prices remain at current levels and remittances continue their existing trend. Repayments of this program starts from 2018, hence they do not see major drain on foreign exchange reserves in the near term. Furthermore, lower current account deficit and expected privatization proceeds would provide cushion to external outlook. Govt has projected external debt repayments of $4.1b in FY16 vs $3.9b in FY15.

State Bank of Pakistan (SBP) in its recently released annual report has highlighted these developments and expects the positive trend to continue as it expects the external account to remain stable, inflation to remain low and GDP growth to sustain.

External account figures for the 5MFY16 show improvement on the back of low oil prices and higher remittances. Sharp fall in oil prices led to lower imports (down 12.3 percent) to $16.3b. This coupled with growth in remittances (up 7.5 percent) to $8.0b helped the country register a 59 percent decline in current account deficit (CAD) to $1.0b. This follows a significant reduction in CAD of 28 percent to $2.2b (1 percent of GDP) in FY15.

During 1QFY16, the government posted fiscal deficit of 1.1 percent compared to 1.2 percent last year. Govt has set fiscal deficit target of 4.3percent for FY16, which will be challenging keeping in view declining oil prices and provisional tax collections for 5MFY16 of Rs829bn, which is only 27percent of the annual target of Rs3.1tn. SBP anticipates fiscal deficit to remain in the range of 4.0-5.0percent in FY16, which is in line with our expectations.

Pakistan real GDP grew by a seven-year high of 4.2 percent in FY15 even though it remained below the 5.1percent target set by the govt and lower than average GDP growth of 5.7percent during high growth period of FY06-08. Issues pertaining to energy crisis , low private sector investment and absence of export led policies continued to hurt growth.

For FY16, experts from Topline Securities anticipate in a report that GDP would grow by 4.6 percent on the back of improving security situation and CPEC, which will lead to higher LSM growth during the year. Further, CPEC will not only stimulate manufacturing but also will positively impact services through improvement in transport, storage and communication subsector.

According to experts, services (58.8 percent of GDP) and agriculture (20.9 percent of GDP) sectors posted improvement in FY15 registering growth of 5.0 percent (4.7 percent in FY14) and 2.9 percent (2.5 percent in FY14) respectively. Services sector benefited from better performance in government sector due to increased salaries of government employees. The financial sector also recorded better performance due to higher profits by banks. Even though some crops witnessed growth slowdown in FY15, the livestock sector (56.0percent of agriculture) posted improvement of 4.1 percent vs. 2.8 percent in FY14. Manufacturing sector growth slowed down to 3.6 percent in FY15 vs. 3.7 percent in FY14 due to slowdown in Large Scale Manufacturing Sector (LSM).