State Bank's quarterly report

The State Bank has confirmed once again that Pakistan's economy is in good shape and poised to achieve or exceed most of the targets fixed for 2003-04.
According to its quarterly report (July-September, 2003) released on 30th December 2003, the GDP is now estimated to grow by 5.4 percent as against the earlier projection of 5.3 percent.
This compares very favourably with the growth rate of 5.1 percent last year, 3.4 percent during 2001-02 and only 2.2 percent in 2000-01.
Also, the growth is expected to be quite broad-based with a strong performance by industry being complemented by a good output of the agriculture and services sectors.
Economic developments during the first quarter of 2003-04 suggest that "the current account continues to witness a substantial surplus; the exchange rate has largely remained within a narrow range; the growth in monetary aggregates has moderated, remaining within annual plan targets (after breaching targets for two successive years); private sector credit has shown an unusual surge and the quarterly budgetary target remains consistent with the annual target.
Also, while interest rates have inched up, and some inflationary pressures are also evident, these movements probably represent a correction after reaching unsustainable historic lows in FY03".
On the other hand, performance in the case of home remittances, cotton production and foreign private investment was less than expected.
However, the State Bank has shown concern about emerging weaknesses in certain areas and, at places, and indicated policy actions to counter the situation.
Although it is satisfied with the actual tax receipts of Rs 94.1 billion during July-September, 2003 as compared to the target of Rs 92.2 billion and feels that the budgetary deficit of 0.9 percent of GDP during the first quarter of the current year is in accordance with the annual 4.0 percent target, a 5.0 percent decline in sales tax receipts appears to be a point of concern.
This is so because the "sales tax is the largest contributor to CBR tax collections, and a continuation of the weak receipts could jeopardise the budgetary deficit target."
The State Bank is also quite concerned about the uptrend in the marginal inflation due primarily to food and energy prices but is not clear whether it is "caused by factors exogenous to monetary developments, or is resulting from the lagged effect of monetary expansion in FY03".
However, it is mindful of the fact that a pre-mature tightening of monetary policy could choke off growth in the economy.
Regarding future course of action, the State Bank has clearly specified that "if the acceleration in CPI inflation continues through December 2003 and beyond, the monetary stance may need to be realigned accordingly." A robust growth in private sector credit during July-September, 2003 is indicative of a major structural shift in the credit cycle.
On the external front, the State Bank seems worried by the anti-dumping duties imposed on bed-wear by the EU and the negative effect on exports to the US if the security concerns of the latter are not adequately addressed.
Two themes highlighted by the State Bank this time relate to the need of macro-economic stability and balanced partnership between the public and private sectors.
The sustainability of economic improvements, according to the quarterly report, will remain crucially dependent on continued government focus on macro-economic stability and financial sector reforms.
To meet the competitive pressures, "it is time that a strong collaborative partnership is forged between the public and private sector."
Quoting the recent experience of Rahim Yar Khan Primary Healthcare Pilot Project, the State Bank has emphasised the need to maximise efficiency of the relatively limited expenditures.
State Bank's quarterly report, in our view, provides ample proof that economy of the country is, more or less, on the right track.
Successive increases in GDP growth rate over a period of three years are a sign that Pakistan could achieve a sustainable growth rate of 6.0 percent in the near future.
If the expected net factor income from abroad is added, the GNP growth rate would be even higher, meaning a steady increase in per capita income in the country, which if properly distributed through a fair fiscal policy, could go a long way in promoting welfare and changing the life patterns of a vast majority of the population.
A very healthy aspect of this positive development is continued financial stability in the country which has resulted from stringent fiscal discipline and prudent monetary policy.
The situation is now undoubtedly vastly different from 1999 when the country was on the brink of default and macro-economic imbalances were threatening monetary stability.
Although multilateral institutions, particularly the IMF, nudged the country in the right direction, credit for changing the country's prospects during the last four years goes to the government which did not hesitate to undertake harsh measures and stayed the course.
It is good to see that the present civilian government also talks about continuity of policies and third generation of reforms.
Hopefully, the task would become easier by improved relations with India and the compromise on LFO with the opposition which would lead to economy of expenditures on defence and the much needed domestic stability.
Some of the specific observations of the State Bank, in our view, need to be probed further with a view to assessing their utility for the country.
It has been argued that efficiency of limited expenditures on social sectors like education and health could be enhanced through better planning and improvement in governance.
The report has referred a practical demonstration of the beneficial effects of such an approach.
The government must think seriously on these lines because spending on these sectors is going to increase in the coming years and if a large part of the money is not properly utilised, the net impact of the increased allocation on the lives of the people could only be marginal.
The views of the State Bank on tax receipts and consumer credit are, however, debatable.
In our view, decline in sales tax should not be a source of great concern if receipts from other sources are adequate enough to meet the overall target of tax collections and budget deficit.
As for consumer credit, we know that it has backward linkages but its vast publicity and easy availability in our milieu could also lead to socio-economic problems by promoting consumerism.
Such a strategy seems to be more suited to developed countries where future stream of income is almost assured and pressures for ostentatious living are not that strong.
The State Bank also has not adequately highlighted the phenomenon of investment, job creation and poverty in the quarterly report.
This could be by design in order to avoid unnecessary repetition or the State Bank may have felt that it is not directly responsible for these areas.
However, people at large are not ordinarily impressed by the gains in macro-economic indicators but are more concerned with the availability of jobs and improvement in their living conditions.
Other sources indicate that investment is not increasing at the required rate due to a number of factors and employment opportunities are also scarce.
The level of poverty is also reported to be increasing. We would urge the State Bank to give more serious thought and devote more space also to these issues which are nearer to the heart of the ordinary people.
Insertion of a special section on making health services work for the poor cannot fill the void.
As far as raising the yields on T-bills and PIBs are concerned, they are supposed to be dictated by market forces.
However, the liquidity in the system is influenced by the operations conducted by the Central Bank.
The Bank has to do a balancing act in opting for growth or attacking inflation. If SBP tightens the rates pre-maturely the growth target of over six percent could be endangered.
Similarly, there is a trade-off between return to the depositors and the cost of finance for businesses.
In order to attack poverty and attract investment to spur growth, SBP may need to keep an easy monetary stance for another two quarters.
But this would also be dependent on the government need to borrow from the banking system.
Fiscal discipline involves meeting the revenue target and controlling the expenditure.
Any slippage on the fiscal side will have to borne by monetary policy. Outside factors such as behaviour of the dollar in the international market and the lending rates in the US are also crucial and would come into play as SBP makes the correct move at the right time.