A lacklustre fiscal report
State Bank’s first quarterly report for the current fiscal released on 17th February, 2015 contains an ordinary assessment of the economy and is largely devoid of the incisive analysis our central bank is famous for. There has been a marked improvement in the economy during the second quarter of FY15, which the State Bank surely is likely to persist throughout the year. Global oil prices have slumped to a fiveyear low, which would help contain trade deficit, inflation dropped to the lowest level in 13 years, the IMF is now satisfied with the progress on economic reforms paving the way for further disbursements, government had successfully issued Sukuks in the international market and the country is likely to get additional funding from the World Bank, ADB and through Coalition Support Fund (CSF).
While discussing the outlook of the economy, the report maintains that “Pakistan’s external sector would benefit most from the decline in oil prices, as petroleum directly makes up nearly 35 percent of our import bill.” Positive outlook on the external sector and low inflation in the second quarter provided room to the SBP to cut the policy rate by 50 basis points in November and reduce it further by 100 basis points to a multi-year low of 8.5 percent in January, 2015. However, it might be challenging to achieve the fiscal consolidation target of 0.6 percentage points in FY15. Revenue mobilisation by FBR so far is much less than the target and a significant decline in oil prices may reduce government revenues from this source while interest payments on the expenditure side will remain strong. Important reforms are needed to reduce the structural component of the fiscal deficit. The government had formulated a mid-term strategy to implement fiscal reforms, ranging from improving revenue generation to promoting private sector participation in loss-making PSEs. Plans are under way to restructure Pakistan Railways, Gencos and Discos so that these could contribute positively to economic development. These plans, however, “should be fast-track, with a specific focus on their managerial and operational inefficiencies and their spillovers on the fiscal sector and the rest of the economy.”
Even a cursory look at the report was enough to indicate that the SBP has generally confined itself this time to the narration of developments in various sectors of the economy during July-September, 2014 and concoction of a positive picture of the economy without highlighting its inherent weaknesses and showing the way forward. Clearly, the economy of Pakistan was faced with a number of challenges in Q1-FY15 including the delay in the release of fourth tranche of Extended Fund Facility (EFF) leading to uncertainty in the FX market and a significant depreciation of the Pak rupee in addition to the damage to agriculture caused by floods and the negative impact of the political events in Islamabad. As a consequence of these adverse developments, it was natural for the economy to suffer losses in terms of growth, fiscal and current accounts etc. The situation during the first quarter of FY15, of course, compared unfavourably with the encouraging signs witnessed in the second half of 2013-14. However, while nobody could argue with these observations as these are now a matter of record, one is somewhat puzzled to realize that the State Bank has omitted to highlight the