SBP’s Annual Report
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.