Pak­istan’s Eco­nomic Woes

Enterprise - - Editor’s desk -

There is con­sid­er­able food for thought for mem­bers in both the houses of par­lia­ment (Na­tional Assem­bly and Se­nate) as well as the fed­eral gov­ern­ment in the third quar­terly re­port of State Bank of Pak­istan The op­po­si­tion mem­bers need to hold the gov­ern­ment of PML (N) ac­count­able for a lack­lus­tre growth in FY15. And, the gov­ern­ment too should re­alise that it needs to un­der­take the nec­es­sary mea­sures to pro­mote growth - pro­vided they care to read and re­spond to chal­lenges by tack­ling the struc­tural rigidi­ties that are im­ped­ing eco­nomic growth and sti­fling job op­por­tu­ni­ties. Pak­istan does not need the In­ter­na­tional Fi­nanc­ing Agen­cies’ help and ad­vice. Our econ­o­mists are good enough to carry out the re­quired re­search and come up with so­lu­tions pro­vided they have the time to study these prob­lems and our de­ci­sion-mak­ers have the po­lit­i­cal will to tackle thorny prob­lems af­flict­ing the econ­omy, namely the twin deficits. Our cur­rent ac­count con­tin­ues to be in deficit. And, we have failed to keep the fis­cal deficit in check by rais­ing the nec­es­sary rev­enues and curb­ing the cur­rent ex­pen­di­ture. SBP’s re­port says that the fall in ex­port earn­ings needs to be re­versed and non-debt cre­at­ing in­flows en­hanced with a view to fi­nanc­ing the cur­rent ac­count deficit in­stead of build­ing up the liq­uid for­eign ex­change re­serves with debt cre­at­ing in­flows. SBP de­scribes the 12.7 per­cent rise in tax rev­enue as ‘mod­est’ and blames the rise in non-dis­cre­tionary spend­ing (in­ter­est on gov­ern­men­tal debt) - squeez­ing the fis­cal space for pro­mo­tion of growth. And, SBP re­searchers feel that the in­ter­a­gency re­ceiv­ables - cir­cu­lar debt - is a for­mi­da­ble ob­sta­cle to­wards ef­fi­cient func­tion­ing of the energy sec­tor.

The cen­tral bank is not happy on re­liance on live­stock to show a boost in agri­cul­ture growth, as the crop sec­tor grew by only one per­cent with im­por­tant crops ris­ing by only 0.3 per­cent as against eight per­cent in FY14. SBP rightly notes that the farm in­come recorded a sharp de­cline as prices of both rice and cot­ton plum­meted in FY15. Fur­ther, the spillover ef­fect of su­gar­cane is vis­i­ble in the man­u­fac­tur­ing sec­tor with Large Scale Man­u­fac­tur­ing (LSM) grow­ing by only 2.5 per­cent dur­ing July to March 2015 against a tar­get of seven per­cent for the year and a 4.6 per­cent growth in cor­re­spond­ing pe­riod of FY14. Within LSM, au­to­mo­biles and con­struc­tion­re­lated in­dus­try per­formed bet­ter than they did the pre­vi­ous year. There was a rise in car sales due to in­tro­duc­tion of new mod­els and Punjab gov­ern­ment’s Apna Roz­gar Scheme ini­tia­tive. SBP also feels for­ward and back­ward link­ages in con­struc­tion ac­tiv­ity lend prom­ise of a healthy growth and it will help in fu­ture. The strong per­for­mance of the ser­vices sec­tor, SBP states, was pri­mary due to a rise in gov­ern­ment salaries and pen­sions and high in­vest­ment by banks in gov­ern­ment bonds. Whole­sale and re­tail sec­tor’s growth was rel­a­tively lower and trans­port while com­mu­ni­ca­tion sec­tor’s growth was clouded by cel­lu­lar com­pa­nies’ fo­cus on SIM ver­i­fi­ca­tion and the cen­tral bank hoped that mo­bile com­pa­nies’ growth will re­bound in FY16 due to is­suance of 3G/4G li­cences.

Bank credit to the pri­vate sec­tor was nearly halved. It was only 5.5 per­cent against 10 per­cent last year; it was ba­si­cally due to soft­en­ing of com­mod­ity prices such as cot­ton, POL, rice, ed­i­ble oil as well as healthy cor­po­rate prof­its re­quir­ing lower work­ing cap­i­tal bor­row­ings. Be­cause of a sig­nif­i­cant drop in in­fla­tion and lower growth of re­serve money, SBP in FY15 eased its mon­e­tary stance fur­ther and nar­rowed its in­ter­est rate cor­ri­dor to 200 from 250 ba­sis points with a com­mit­ment that money mar­ket rate will be close to its rate of 6.5 per­cent. How­ever, SBP is wor­ried on ac­count of slight higher bor­row­ing for bud­getary fi­nanc­ing in FY15 over FY14. A mas­sive rise in in­ter­est pay­ments to 40 per­cent of cur­rent ex­pen­di­ture is a source of con­cern. The SBP anal­y­sis shows that de­pre­ci­at­ing the PKR will not pro­vide for higher ex­ports. And, the coun­try needs in­stead a more ef­fec­tive trade pol­icy cou­pled with a com­pre­hen­sive in­dus­trial pol­icy. We are re­quired to add an ef­fi­cient labour pol­icy to this since with­out train­ing and upgra­da­tion of skills higher pro­duc­tiv­ity will never be achieved. The com­plex re­la­tions in the im­port sub­sti­tu­tion in­dus­tries be­tween raw ma­te­rial and ma­chin­ery need to be stud­ied crit­i­cally. It needs to be un­der­stood that merely hav­ing a com­pet­i­tive ex­change rate to over­come struc­tural is­sues may not work. SBP has rightly pointed out that the gov­ern­ment, thus far, has been un­able to sell any bleed­ing PSE or achieve a shift in man­age­ment con­trol of a ma­jor PSE. SBP says di­vest­ing shares in prof­itable fi­nan­cial in­sti­tu­tions (UBL, ABL and HBL) are cap­i­tal mar­ket trans­ac­tions and un­til sell-off of loss-mak­ing en­ti­ties or of energy-re­lated PSEs these units would con­tinue to re­main a bur­den on the ex­che­quer. Fur­ther, a low tax-to-GDP ra­tio re­mains a re­cur­ring prob­lem.

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