Economy at cross roads due to political impasse Despite winning the elections last year with a majority and improving the economic situation on some fronts, the PML-N government seems to be facing multipronged challenges due to allegations of rigging in elections by PTI and rising tensions with the Army, leading to serious question marks over its ability to complete its five year tenure. Though political tensions have de-escalated for the time being, it can flare up due any untoward incident, while Supreme Courts hearing with regards to the Election being free & fair and Prime Minister disqualification is also a political event to watch out for. Given the current rise in political fervor it seems that we may be in for a fresh election much before the scheduled one of CY18. The government is reluctant to follow through with the tough economic reforms due to political issues. If the political impasse ends peacefully, then only will the government be able to continue the reforms process. However, we do want to point out that the government has procrastinated on key policy decisions much before the political crises started. Economic indicators after gradually improving during FY14 are starting to wobble due to inability of the government to follow through on the tough economic prescriptions. GDP growth target of 5% looks unlikely to be reached especially after recent floods and slowdown in LSM numbers. Tax collection numbers have improved by 14% YoY in 1QFY15, but are still below the target, with an uphill task of 26% rise needed in the remaining nine months of FY15, if the FBR is to achieve its target. Monthly inflation numbers are on a downward trend due to high base effect and low money supply numbers (credit to government) with this trend expected to continue in 2QFY15 as well, but in 2HFY15, inflation is projected to show a spike due to base effect. Because of rising inflation numbers in the future, we dont expect any discount rate cut in the remaining FY15.. The external account has turned out to be the most vulnerable with trade deficit rising by a hefty 55% in 2MFY15, in our view due to wrong policy of strengthening PKR policy adopted since Mar-14 which has stimulated imports and disadvantaged exporters. The recent dip in commodity prices (especially Crude Oil) bodes well for the external side, though low cotton prices will negatively affect exports somewhat, but on an overall basis it will help in reducing the current account deficit. Research Taurus Securities Limited
Posted on: Sat, 11 Oct 2014 10:33:35 +0000
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