SBP’s An­nual Re­port

Enterprise - - Editor’s desk -

The State Bank’s an­nual re­port re­leased on 11th De­cem­ber, 2015 con­tains an ob­jec­tive as­sess­ment of the econ­omy for FY15, along with prospects for the cur­rent year. Ac­cord­ing to the re­port, Pak­istan’s econ­omy did rea­son­ably well dur­ing 2014-15. While GDP growth posted a mar­ginal in­crease over last year, other key macroe­co­nomic in­di­ca­tors like in­fla­tion and fis­cal and cur­rent ac­count bal­ances recorded im­prove­ments. Av­er­age in­fla­tion came down sharply in FY15 to 4.5 per­cent from 8.6 per­cent last year. This was also well be­low the tar­get of 8 per­cent and SBP pro­jec­tions at the be­gin­ning of the year. A sharp fall in global com­mod­ity prices, a strong ru­pee and low POL prices con­trib­uted to the soft­en­ing in in­fla­tion. Fis­cal deficit also im­proved slightly to 5.3 per­cent of GDP from 5.5 per­cent reg­is­tered last year. This was a wel­come de­vel­op­ment, “given that the sharp de­cline in oil prices and sub­dued man­u­fac­tur­ing ac­tiv­i­ties had made al­ready slug­gish tax col­lec­tions more dif­fi­cult.” De­vel­op­ment ex­pen­di­ture by the gov­ern­ment, nonethe­less, re­mained strong through most of the year, fo­cus­ing mainly on in­fra­struc­ture de­vel­op­ment. Cur­rent ac­count deficit also nar­rowed to dol­lar 2.6 bil­lion from dol­lar 3.1 bil­lion last year. Ex­ter­nal sec­tor had be­come more stable on ac­count of a ro­bust growth in work­ers’ re­mit­tances, con­tin­ued sup­port from IFIs and a sharp de­cline in global oil prices. Grow­ing com­fort on ex­ter­nal ac­count, a sharp re­duc­tion in in­fla­tion and con­tained fis­cal deficit, al­lowed the SBP to change its mon­e­tary pol­icy stance from a more con­ser­va­tive to a con­sid­er­ably eas­ing.

Go­ing for­ward, macro en­vi­ron­ment for FY16 ap­pears pos­i­tive. Out­look for ex­ter­nal sec­tor is stable, in­fla­tion is again ex­pected to re­main be­low the tar­get, fis­cal ac­count would be in a good shape and global com­mod­ity prices are likely to re­main soft. Econ­omy could also ben­e­fit from a con­sid­er­able cut in the pol­icy rate, im­prove­ment in se­cu­rity sit­u­a­tion, the CPEC and the US deal with Iran. For a sus­tained high GDP growth, long stand­ing growth ham­per­ing is­sues in­clud­ing con­tin­ued en­ergy short­ages, wa­ter scarcity and low tax-to-GDP ra­tio need to be re­solved on a pri­or­ity ba­sis. The Vi­sion 2025 aim­ing at GDP growth rate of above 8 per­cent from 2018 and on­wards would re­quire a sub­stan­tial boost to pro­duc­tiv­ity lev­els, through in­vest­ment in hu­man cap­i­tal.

While giv­ing a pos­i­tive as­sess­ment of the econ­omy, State Bank has this time not felt shy of point­ing out the cur­rent weak­nesses of the econ­omy and offering pol­icy pre­scrip­tions. For in­stance, SBP is very clear that per­sis­tently low level of in­vest­ments is the rea­son that the coun­try had not been able to post sus­tained and high growth in GDP. In­vestor con­fi­dence de­mands the pres­ence of a pre­dictable macroe­co­nomic en­vi­ron­ment with a well-co-or­di­nated and con­sis­tent long-term in­dus­trial and trade poli­cies. High­light­ing the con­cerns on longterm food se­cu­rity in the coun­try, the re­port says that en­sur­ing food sus­tain­abil­ity would be more chal­leng­ing in the long term due to cli­mate change and its loom­ing ef­fect on food and wa­ter se­cu­rity. Con­tri­bu­tion of with­hold­ing tax in direct taxes had in­creased to 65 per­cent from 50 per­cent in FY10. Pub­lic debt to GDP ra­tio still ex­ceeds the 60 per­cent limit stip­u­lated in the FRDL Act, 2005. Af­ter re­leas­ing the di­vis­i­ble pool un­der the 7th NFC Award and the 18th amend­ment, the fed­eral gov­ern­ment is left with re­sources which can only meet in­ter­est pay­ments and de­fence ex­penses. Around 80 per­cent of the in­cre­men­tal re­mit­tance in­flows in FY15 came from GCC coun­tries alone and this re­mit­tance growth could be at risk if a sharp de­cline in oil mar­ket per­sists. On the other hand, ex­ports and for­eign direct in­vest­ment - more sus­tain­able sources of for­eign ex­change earn­ings - are not show­ing any en­cour­ag­ing pic­ture.

There could hardly be any ar­gu­ment against the as­sess­ment and anal­y­sis of the econ­omy by the SBP which is quite fair and com­pre­hen­sive. The rea­son be­hind such an in­ge­nious ap­proach could be the greater au­ton­omy granted to the State Bank un­der the re­vised Act. Look­ing at the re­cent quar­terly re­ports, there was grow­ing ap­pre­hen­sion in cer­tain quar­ters that the State Bank toed the gov­ern­ment line and cared more about the com­fort of the Min­istry of Fi­nance rather than any­thing else. How­ever, the present An­nual Re­port may dis­pel such a per­cep­tion. An­other char­ac­ter­is­tic of the re­port is that it has high­lighted the vul­ner­a­bil­i­ties of the econ­omy and pre­scribed pol­icy pro­pos­als, wher­ever pos­si­ble, in a rather po­lite tone and sim­ple man­ner. How­ever, ex­cept the de­cline in in­fla­tion­ary pres­sures, all other gains were too small to make a sig­nif­i­cant im­pact on the prospects of econ­omy. For in­stance, growth rate, though slightly bet­ter than last year’s, was not enough to make a mean­ing­ful in­crease in the per capita in­come and im­prove the qual­ity of life of or­di­nary cit­i­zens. Sim­i­larly, the re­duc­tion in fis­cal and ex­ter­nal sec­tor ac­counts deficits was not only in­signif­i­cant but dif­fi­cult to sus­tain due to the coun­try’s de­pen­dence on var­i­ous sources of ex­ter­nal fi­nance and fis­cal bor­row­ings. Con­tin­u­ous flow of as­sis­tance from the IMF that also en­abled Pak­istan to get loans from other sources, was touted as an achieve­ment that was ac­tu­ally con­tin­gent on the good­will of the IMF Ex­ec­u­tive Board Mem­bers who granted a num­ber of waivers for miss­ing agreed tar­gets. Any­how, var­i­ous ob­ser­va­tions in the Re­port ap­pear to be sound and timely. For ex­am­ple, the need for sharply rais­ing the level of in­vest­ment and boost­ing in­vestor con­fi­dence with­out which a sus­tained in­crease in GDP is not pos­si­ble has been am­ply high­lighted. Since both th­ese vari­ables are dif­fi­cult to im­prove due to de­pressed in­comes, law and or­der chal­lenges, ram­pant cor­rup­tion and acute en­ergy short­age, Ah­san Iqbal’s ‘Vi­sion 2025’ seems im­pos­si­ble to ac­com­plish. Fur­ther­more, growth rates as con­tained in var­i­ous gov­ern­ment doc­u­ments are not very re­li­able as a large part of the econ­omy is un­doc­u­mented and, as such, not re­flected in the of­fi­cial data. This makes the of­fi­cial growth data sus­pect and could also be a proof that the level of na­tional in­come is un­der-es­ti­mated in Pak­istan and poverty lev­els and un­em­ploy­ment could be lower than gen­er­ally be­lieved.

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