SBP says fiscal deficit key challenge to Pak economy
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
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.