Economic Ac­tiv­ity Shows Growth

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Cau­tious Op­ti­mism: Pak­istan’s gov­ern­ment ex­pects its econ­omy to

pick up this year.

Ac­cord­ing to the State Bank of Pak­istan’s third quar­terly re­port for FY14 , the Pak­istani econ­omy “ap­pears” to have turned a cor­ner dur­ing the third quar­ter of FY14, and sen­ti­ments about the econ­omy “seem” to have im­proved.

One may never know the an­swer to that ques­tion, for its always de­bat­able as to what the SBP might ac­tu­ally be think­ing. But, here are a few of its rel­a­tively con­crete ob­ser­va­tions. “It must be said that th­ese signs of im­prove­ments should not dis­count the chal­lenges faced by the econ­omy; and ef­forts for much needed struc­tural re­forms should con­tinue,” the SBP said.

On the sub­ject of LSM growth, the SBP said that it is not broad based. “This un­even growth can be traced to struc­tural im­bal­ances that need to be ad­dressed,” the re­port said, while cast­ing doubts over the abil­ity to achieve full-year LSM growth of 5.3 per­cent es­ti­mated by the gov­ern­ment.

The SBP says that to­tal public debt (ex­ter­nal plus do­mes­tic) has al­ready crossed the limit of 60 per­cent of GDP, set by the Fis­cal Re­spon­si­bil­ity and Debt Lim­i­ta­tion Act (2005) for FY13 on­ward. “Hence, any ad­di­tion to the ex­ter­nal debt should at least be matched with an equiv­a­lent re­duc­tion in the do­mes­tic debt out­stand­ing.”

In per­haps one of its most vo­cal state­ments, the SBP has shown se­ri­ous con­cern over cor­rup­tion in public spend­ing. “The im­por­tance given to trans­port and con­struc­tion at the pro­vin­cial level is also in­trigu­ing. While the dif­fer­ences in sub-na­tional devel­op­ment pri­or­i­ties can be at­trib­uted to in­di­vid­ual pro­vin­cial needs, a re­view of lit­er­a­ture on the de­ter­mi­nants of public spend­ing pro­vides an­other per­spec­tive,” the SBP said.

Cit­ing a set of multi-year aca­demic stud­ies from across the world, the SBP said that the com­po­si­tion of gov­ern­ment spend­ing is of­ten shaped by the de­gree of in­ef­fi­cien­cies and wastages of fi­nan­cial re­sources in a coun­try. The types of gov­ern­ment ex­pen­di­ture that cre­ates c op­por­tu­ni­ties for bribe tak­ing and other types of rent seek­ing be­hav behaviour are of­ten pri­or­i­tized when gover­nance is poor. “As a re­sult re­sult, in­vest­ments in huge pro­jects (build (build­ings, high­ways, air­ports, etc.) at­trac at­tract more public funds com­pared to soc so­cial sec­tor.”

O One study cited by the SBP prove proves that cor­rup­tion plays an im­por im­por­tant role in dis­tribut­ing gover gov­ern­ment spend­ing between var­iou var­i­ous sec­tors. “Specif­i­cally, it favou favours spend­ing on de­fense, fuel, public ser­vices, law and or­der at the cost of o spend­ing on so­cial sec­tor.”

Th This the­sis surely seems familiar to Pak­istan. Pak But, in­ter­est­ingly, go­ing by this the­sis, KPK and Pun­jab are com­pet­ing head to head on pos­si­ble cor­rup­tion in gov­ern­ment spend­ing, whereas the oft blamed Sindh is far­ing bet­ter (see graph).

While SBPs third quar­terly re­port talks about how ru­pees ap­pre­ci­a­tion might af­fect re­mit­tances it fails to delve into on how ru­pee ap­pre­ci­a­tion would im­pact Pak­istans trade bal­ance go­ing for­ward.

The only thing the re­port said on the sub­ject is that a part of the loss of com­pet­i­tive­ness “could be off­set by the avail­abil­ity of cheaper im­ported in­puts, which most Pak­istani ex­porters are de­pen­dent upon”. For a sub­ject so com­plex and hotly de­bated in po­lit­i­cal and economic cir­cles, one would ex­pect the SBP to shed more light on it than just two lines.

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