SBP says fis­cal deficit key chal­lenge to Pak econ­omy

The Pak Banker - - FRONT PAGE -

Staff Re­porter

State Bank of Pak­istan (SBP) de­picts a bleak pic­ture of the econ­omy mainly on ac­count of the fis­cal deficit in the sec­ond half of cur­rent fi­nan­cial year 2013-14 de­spite the fact that pres­sure on coun­try's re­serves has eased off sig­nif­i­cantly.

State Bank of Pak­istan (SBP) in its sec­ond quar­terly re­port "The State of Pak­istan Econ­omy" here on Fri­day said the higher de­vel­op­ment spend­ing and an an­tic­i­pated in­crease in the debt ser­vic­ing will push up over­all spend­ing in the sec­ond half. Even ac­count­ing for the ex­pected CSF and the pro­ceeds from 3G li­censes be­fore July 2014, 16 the over­all fis­cal deficit is likely to re­main in the range of 6.0 to 7.0 per­cent of GDP, the re­port said. Fur­ther­more, the main con­cern is a weaker than ex­pected per­for­mance of agri­cul­ture. How­ever, LSM is well po­si­tioned to achieve the growth tar­get set in the An­nual Plan for FY14, even if value ad­di­tion by fer­til­izer and su­gar are to sub­side in the re­main­ing part of FY14. The full year fis­cal sit­u­a­tion will de­pend on year-end sub­sidy pay­ments; the pos­si­ble need to pay off the cir­cu­lar debt in the power sec­tor; the terms of pay­ments for the 3G li­censes opted by the cel- lu­lar com­pa­nies; and for­mance of FBR.

The whole­sale & re­tail trade and tele­com are likely to post an im­prove­ment over the pre­vi­ous year, whereas the per­for­mance of fi­nance & in­sur­ance is likely to re­main sub­dued dur­ing FY14.

The in­fla­tion­ary pres­sures have ta­pered since De­cem­ber 2013; head­line CPI growth de­clined to 7.9 per­cent in JanFeb 2014, com­pared to 9.2 per­cent in De­cem­ber 2013. This can be traced to the sta­bil­ity in food in­fla­tion, the re­cent re­duc­tion in re­tail POL prices, and the sta­bil­ity and re­cent ap­pre­ci­a­tion of the PKR par­ity. If the Fe­bru­aryMarch 2014 in­flow is chan­neled into PSDP, this should ease the fi­nanc­ing con­straint. In the real sec­tor, GDP growth is likely to re­main in the range of 3.5 to 4.5 per­cent.

Pak­istan met lumpy IMF re­pay­ments and ex­pects sub­stan­tial in­flows from the IFIs be­fore end-June 2014 the mar­ket has re­sponded very pos­i­tively to the unan­tic­i­pated in­flow of US$ 1.5 bil­lion from a GCC coun­try. The dis­burse­ment of CSF is on track; re­mit­tances are post­ing strong growth; and global com­mod­ity prices are likely to re­main sta­ble. If the govern­ment is able to re­al­ize the bud­geted CSF and 3G in­flows, the cur­rent ac­count deficit is likely to be less than

the

per- $3.5 bil­lion for the full year.

Fur­ther­more, the lat­est 'SBP- IBA Con­sumer Con­fi­dence and In­fla­tion Ex­pec­ta­tions Sur­vey' of Jan­uary 2014, sug­gests that in­fla­tion­ary ex­pec­ta­tions are eas­ing. Based on these fac­tors, the pro­jected in­fla­tion to re­main in the range of 8.5 to 9.5 per­cent, un­less the govern­ment an­nounces an in­crease in house­hold gas tar­iffs, which was due in Jan­uary 2014.

While the macroe­co­nomic pic­ture is more en­cour­ag­ing, a sus­tain­able im­prove­ment still re­quires deep-seated struc­tural re­forms. A tan­gi­ble re­duc­tion in the fis­cal deficit is cru­cial to al­le­vi­ate fi­nanc­ing pres­sure from the bank­ing sys­tem, which is all the more im­por­tant to sup­port the re­cent in­crease in pri­vate sec­tor credit off-take; this in turn is an im­por­tant fac­tor for the cur­rent im­prove­ment in LSM. More im­por­tantly, a sus­tained im­prove­ment in LSM can help achieve the long-run growth ob­jec­tives of the coun­try in terms of em­ploy­ment gen­er­a­tion; economies of scale; tech­no­log­i­cal progress; and spillover ef­fects to other sec­tors of the econ­omy. SBP high­lighted that the mea­sures to in­crease tax rev­enues have been guided by ex­pe­di­ency rather than a fo­cus on the struc­tural prob­lems in the fis­cal sys­tem.

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