State Bank's third quarterly report
State Bank's third quarterly report for FY12 released on 22nd June seems to be another reminder to Islamabad that country's economy is in a very poor shape. It notes at the very outset that "although Pakistan's economy has shown some recovery in terms of GDP growth, key macro indicators still remain weak." Inflationary expectations were entrenched, financing the current account deficit remains challenging and fiscal accounts of the country were under pressure despite growth in tax collections. Energy shortages and low investment continue to compromise the economy's capacity for growth. Quoting the data of National Income Accounts Committee released by the government, the SBP, however, has pointed out that the GDP growth rate of 3.7 percent for FY12, though less than the target of 4.2 percent, was notable, "given the considerable damage to the cotton crop due to floods in August, 2011; ongoing energy shortages; the rise in international oil prices; and security concerns." Also, growth this year was more broad-based with a larger contribution coming from the commodity producing sectors compared to FY11. Except for a slight pickup in growth from last year's level of 3.0 percent, all other indicators of the economy had shown worsening trends. Current information suggests a budget deficit of 4.3 percent of GDP for July-March, 2012 and the budgetary gap for the full year was likely to exceed the revised target of 4.7 percent. In terms of financing the gap, government was relying more on domestic sources as external sources were drying up. Of late, budgetary borrowings to fill this gap have been increasingly skewed towards loans from the central bank. As per requirement of the FRDL Act, 2005, the government was obliged to meet a net quarterly limit of zero for its borrowings from the central bank but it has borrowed Rs 70.8 billion during Q3-FY12 in addition to the borrowings of Rs 227.9 billion in the previous quarter. Government domestic debt has recorded an increase of Rs 1.2 trillion during July-March, 2012 to reach Rs 7.2 trillion mark. Due to pre-emption of financial resources from the banking system for budgetary support, the SBP had been providing high level of liquidity to the market to ensure smooth functioning of the financial markets and payment system. Needless to say, that all these injections had inflationary implications. The CPI inflation, according to the State Bank, was now expected to be in the range of 10.5-11.5 percent for FY12. Also, with the government's growing appetite for funding, banks had little incentive to finance the private sector. Current account deficit of the country was dollar 3.1 billion during July-March, FY12 as compared to dollar 10.0 million in the corresponding period last year. Expected inflows under CSF, auction for 3G licences and arrears from PTCL privatisation did not materialise. As a result, foreign exchange reserves fell to dollar 16.4 billion by end March, 2012 from dollar 18.2 billion at end June, 2011. SBP reserves declined throughout FY12, whereas FX reserves of scheduled banks increased during this period. Looking forward, persistent inflation and pressure on the fiscal and current accounts remain the key challenges to the economy. The range of fiscal deficit estimated by the SBP was 5.5 - 6.5 percent of GDP while current account deficit was projected to be between1.5 percent to 2.5 percent of GDP during FY12. The addition of "afterthought" by Mushtaq Khan, Chief Economic Advisor of SBP in the quarterly report in its first chapter on "overview and outlook" this time was unprecedented. We don't know the purpose and the wisdom behind such a write-up but could only say that such an "afterthought" could only be confusing for most of the people. If he had to say anything which was really substantive, it could have been reflected in the contents of the report without mentioning his name. Seen objectively, the root of most of the problems is the continuous deterioration in fiscal accounts of the country. While revenue collections are low due to government's inability to broad-base the tax regime and check tax evasion, expenditures are rising continuously due to a number of factors. Public Sector Enterprises (PSEs) continue to be a major reason of public exchequer haemorrhage and foreign sources of financing are drying up. For instance, there is no hope that receipts from CSF would materialise anytime soon due to obvious reasons. As against the revised target of 4.7 percent of GDP, most of the analysts agree that fiscal deficit could be nearly as high as 7 percent of GDP in 2011-12. In desperation, government continues to rely increasingly on banking sources, especially the State Bank, to finance its budget deficit which is stoking inflation. More worrying is the position of external sector which is coming under increasing pressure. Keeping in view the latest trends, current account deficit is now projected to be around dollar 4.0 billion during FY12, State Bank's foreign exchange reserves are down to dollar 10.68 billion while the PKR has touched a new low of over Rs 96 to a dollar. It is widely believed that foreign exchange reserves would continue to be depleted at a fast rate due to a hefty current account deficit and heavy repayments to the IMF for its SBA facility availed earlier by Pakistan. It is strongly expected that the country would be forced to negotiate another programme with the Fund on very stringent terms or curtail its imports drastically, which could have severe implications for the economy. The signs are of course highly ominous but nobody seems to be listening in Islamabad and the State Bank's prognosis and advice are likely to fall on deaf areas. Proof of such an indifferent attitude is repeated warnings of the central bank and the Auditor General of the country that FRDL Act 2005 is being violated and the government has not even cared to explain the situation to parliament. Strangely, no member of the opposition has also found time to protest against such a grave violation. Those in Islamabad who could really take decisions to improve economy seem to be so much preoccupied with the ongoing political power struggle that economy of the country does not matter much for them.
Copyright Business Recorder, 2012