Increasing government reliance on commercial banks for fiscal financing is crowding out private credit, while development spending is being sacrificed to tame the budget deficit. Add to that the energy woes, and the industrial competitiveness is being plagued like never before in recent memory. Indeed, the prospects of future growth and employment generation for the country's bulging youth are getting dim.
The fiscal gap can be reduced by enhancing tax revenues and by turning around the ailing public sector entities, through restructuring or privatisation, subject to tough political will. At the same time, there is a need to work a lot on infrastructure, as well as improving management and organisation to enhance productivity to cope up with the growth trajectory of Pakistan's economic peers.
Infrastructure, which is the hardware of economic growth, is perceived to be at lower levels in Pakistan relative to many developing economies. Pakistan is ranked 123rd on Global Competitiveness Index (out of 139 countries) whereas India, China and Vietnam are at 51, 27 and 59 respectively. A similar tale is to tell on the quality of electric supply.
Nonetheless, on the quality of roads, Pakistan (ranked 72 in GCI) is doing better than India, while being at par with Vietnam, Thailand and Indonesia. Also in terms of port infrastructure, the country is not lagging behind many, though it still needs to do a lot on improving railroad in which Pakistan stands at 55 versus India at 23.
Hence, on the infrastructure front, resources and efforts are required in selective areas like power supply, railroads and air transport. Interestingly, these sectors are at the helm of those public entities that are considered to be highest in corruption and are famous for draining the taxpayers' money.
More importantly, to be on the path of modern growth trajectory, innovation, conducive environment for entrepreneurship, well-defined property rights, education & technology and better functioning markets are imperative to enhance productivity and move away from the traditional engines of growth.
This is one particular area, where Pakistan is in serious deficit. Pakistan's performance on the software of growth is virtually at the bottom on every indicator, relative to emerging economies. On property rights, the country is ranked at 99 much lower than India (61) and China (43). The corruption picture is even worse, whereas in the most important indicator - ie education and training, where Pakistan is ranked 123 - the situation is the worst.
A good market mechanism that paves for new players and existing players to become big is not perceived to be in good shape in international ratings. We are as low as 91 on goods market efficiency and at rock-bottom in labour market efficiency (131) whereas India and China are at 92 and 38 respectively. Similarly the ranking in financial markets and technological readiness are dismal.
The Planning Commission is well aware of these shortcomings and is cognisant about the need to improve productivity to bring high growing labour force in the market as well as to make them more efficient. Contrary to the need to spend more on education and technical training, government spending on education is less than the subsidies to Pepco, PIA and Pakistan Railways.
Pakistan needs to move from the mindset of public led brick and mortar projects to private sector technology-based development. The funds shall be used to incentivise the private sector to be innovative and be technology-intensive, while the government's role should be to facilitate markets to grow, to reduce friction and improve property rights to encourage entrepreneurship in the country.
MONEY AGGREGATES:
The government kept on reducing its borrowing burden on SBP as with the decline of Rs36 billion for the week ending Mar 26 year to date central bank's inflationary borrowing is restricted to Rs43 billion. Total stock of SBP borrowing is at Rs1214 billion, much lower than promised September end level of Rs1290 billion.
However, there is a cost associated with it, as in the absence of foreign fiscal funding, the burden is tilting more towards commercial banks which is leaving little, if any, for the private sector to borrow. Government has raised Rs348 billion in nine months of this fiscal year from scheduled banks versus Rs188 billion in the corresponding period last year.
For the week ending Mar 26 currency in circulation reduced by Rs 24 billion and with slight Rs7 billion increase in demand and time liabilities over all money supply fell by Rs18 billion or 0.32 percent to make the year to date M2 to increase by Rs523 billion (9.05%) versus Rs276 billion (5.39%) in the similar period last year.
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KEY MONETARY AGGREGATES AS ON MAR 26
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Rs (mn)
26-Mar 19-Mar Change
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Currency in Circulation 231,024 254,994 (23,970)
Total Demand & Time Deposits 287,641 280,941 6,700
Broad Money (M2) 522,857 541,109 (18,252)
NFA 187,874 176,883 10,991
NDA 334,984 364,224 (29,240)
Net Government Borrowing 275,441 308,035 (32,594)
Borrowing for budgetary support 391,123 426,859 (35,736)
from SBP 42,489 87,328 (44,839)
from scheduled banks 348,634 339,531 9,103
Commodity operation (119,535) (122,648) 3,113
Credit to non-govt sector 231,661 229,868 1,793
to private sector 200,671 202,757 (2,086)
to PSEs 30,771 26,890 3,881
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Source: SBP
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