A delay is not a good thing. The SBP’s first quarterly review for the Jul-Sep period was released last Friday. The late release of this otherwise sound document meant that there was little in the content that wasn’t already known. Still, the report carries valuable advice for the federal government.
It was intriguing to see that while the report mentioned the PBS-calculated 1QFY14 GDP growth of 5 percent (2.9 percent in 1QFY13); it fell short of endorsing it, by footnoting that the “volumes of nominal and real GDP are not yet released.”
“It is important to highlight that since PBS has not made public the methodology of quarterly national accounts, it is not possible to clearly identify seasonal factors for growth estimation. In our view, for instance, the impact of lower cotton production, and below-target sugarcane growth, will be evident in growth numbers from second quarter onwards, as the harvest for these crops come in full swing during Oct-Dec,” the SBP report added.
What makes the report interesting is its policy advice to the center: structural issues always come back to haunt economic recovery. In the first quarter, the circular debt re-emerged in August 2013. Budgetary borrowings from the SBP also increased as private banks largely remained on the sidelines. The SBP emphasized that:
“…the policy mix which delivered the better fiscal outcome (in 1QFY14) may not be sustainable in the medium to long-term; tougher decisions on energy prices and institutional reforms are yet to be taken.” It also noted that budgetary utilisation of USF money will defeat the original purpose of this fund for telecom development. The USF money contributed to a reduction in budget deficit by 0.3 percent of GDP.
On the external front, SBP expects forex pressure to ease off in the second half. Expected full-year CSF inflows of $1.2 billion, similar revenue from the 3G auction, lower scheduled repayments to the IMF and remittance support may help current account deficit to remain between 1-1.8 percent of GDP.
It also mentioned that “the government is expecting financing of around $3.3 billion in the second half of FY14, through various sources including a new Eurobond; disinvestments through the stock market; privatization proceeds from Etisalat; and structured transactions.”
On the fiscal side, after incorporating the revenue impact of CSF and 3G auction, and higher interest-related expenditures in second half, SBP projected a full-year fiscal deficit in the range of 6-7 percent of GDP. It expects full-year GDP growth and inflation to remain in the 3-4 percent and 10-11 percent ranges, respectively.
The SBP seconded government priorities and appreciated government’s efforts in engaging the IFIs. But it noted that “…the government should speed up structural reforms in the fiscal and energy sectors… the policies should aim to sustainably manage long-standing issues, instead of implementing makeshift arrangements…”
The problem is with pace, and not the direction, apparently. And that’s what the central bank seems to be asking the government: step up the structural reforms agenda.
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