SBPs FY11 economic roundup

The call for improvement in governance as practiced in Pakistan is high on analysts agenda these days. Even SBPs latest annual report for FY11-State of the Economy-highlights that the major predicaments affecting the economy have a lot to do with governance. Calling Pakistans current economic position as that of "stagflation", the central bank chalks out some major, inter-related issues that warrant "urgent policy attention", such as fiscal problems, domestic debt issues, power shortage and the external sector. Reflecting on the real sector, SBP points out the poor performance of the manufacturing sector-a negative 0.1 percent growth in the industrial sector in FY11-and the relatively better performance of the services sector-an overall growth of 4.1 percent in the last fiscal year. The former owes its poor performance to the Great Floods of 2010, while the latter was supported by an increase in government salaries and defence spending. Overall, with a GDP growth rate of 2.4 percent in FY11, Pakistans performance this fiscal year paled in comparison to key Asian peers. Domestic issues, including energy shortages, lawlessness and low investment are riding behind Pakistans ailing economic performance. The severity of the situation can be gauged from the following words of the SBP: "Pakistans investment rate was only 13.4 percent in FY11, which is the lowest since FY74." Further criticising fiscal mismanagement in Pakistan, the central bank disapproves the lack of implementation of key fiscal reforms such as broadening of the tax base, phasing out of subsidies, restructuring of loss-making state-owned enterprises (SOE), etc. The revenue side was pumped up through ad hoc measures such as the flood surcharge imposed in the latter half of the fiscal year, which just added on to the burden of existing taxpayers. In fact, the central bank also highlights that tax revenues actually decreased in real terms. The expenditure side, on the other hand, was marked by a misallocation of spending, with development expenditures sacrificed for rehabilitation of flood-affected persons, expenditure on Federal subsidies three times greater than budgeted, and diseased SOEs drilling a hole in the governments wallet. The undesirable fiscal deficit had a bearing on the countrys domestic debt situation, which is worsened by Rs.1.7 trillion to Rs.11 trillion in FY11. The Rs.1.1 trillion the government borrowed from domestic sources in FY11 actually accounted for over 90 percent of the fiscal deficit that year. Adding to the ado was the heavy burden of debt servicing, as the SBP report says: "Interest payments alone accounted for 32.8 percent of government revenues last fiscal year." Domestic borrowing by the government has a direct impact on the private sector, as lending to the government largely crowds out private credit, which grew by a meager 4.0 percent in FY11 as compared to an increase of 74.5 percent in government borrowing from commercial banks. Moving on to the energy crisis, the menace is guilty of costing the government 3-4 percent of GDP in FY11 with problems in the sector largely unaddressed. And all these issues are to be traced to poor governance in Pakistan, institutional weaknesses being an ailment that needs to be urgently cured. Failing that, the countrys economic performance is likely to continue to suffer, as the report reiterates: "Economic policies will be ineffective unless they are supported by strong institutions."

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Selected macroeconomic indicators
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                                  FY10                FY11
                                       Targeted     Actual
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% growth
Real GDP                           3.8       4.5       2.4
Large-scale manufacturing          4.9       4.9       1.0
Services                           2.9       4.7       4.1
Consumer price index (base=FY01)  11.7       9.5      13.9
Private sector credit              3.9         -         4
% of GDP
Total investment                  15.4      15.4      13.4
National savings                  13.1      13.2      13.6
Tax revenue                         10        11       9.4
Development expenditure            2.1       4.3       4.8
Budgetary deficit                  6.3         4       6.6
Public debt - domestic            31.4         -      33.3
Public debt - foreign             31.6         -      28.2
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Source: SBP annual report 2010-11