Continuing energy shortages, water scarcity, low tax-to-GDP ratio and sluggish investment rate could hamper sustained growth; therefore, these need to be resolved on priority basis, says the State Bank of Pakistan. In SBP''''''''s Annual Report for FY2014-15, issued on Friday, the central bank while expressing its pleasure on achieving macroeconomic stability with subdued inflation, improvement in fiscal balance and current account balance noted that the overall impact of government policies appeared muted on account of production cuts in crop sector due to bad weather, energy shortfall, low external demand.
SBP says that in fact 4.2 percent growth in GDP looks much decent in the presence of these factors despite being below the target of 5.1 percent for financial year 2014-15. According to SBP''''''''s assessment, a 30.1 percent drop in furnace oil reduced the cost of power generation by 22.2 percent. "Had Nepra passed on the benefit in generation cost to consumers - this would have arrested the build-up in circular debt and further reduced the tariff deferential subsidy (TDS)". The volume of circular debt, according to SBP, has reached Rs 648 billion.
SBP report emphasises that while improving the governance, it is imperative to address the underlying structural issues in the power sector. The decline in average cost of generation from falling prices of residual furnace oil (RFO) enabled the government to arrest the growing receivables by holding back benefits to consumers. SBP report says commercial banks'''''''' credit to private sector (in terms of GDP) in Pakistan has witnessed a noticeable decline since FY08, plunging from 27 percent in FY08 to just 13 percent in FY15. Credit to GDP ratio has reached historic lows. It is the lowest among regional economies. And manufacturing having the highest share in bank credit, while services contributing 55 percent of the GDP gets less than 20 percent share of bank credit.
Higher credit to GDP ratio suggests financial deepening of the economy, allocation efficiency and is regarded as a boost to the economy. But in Pakistan more than 80 percent of bank credit is being availed by 1.8 percent of borrowers; suggesting bank credit is heavily skewed towards corporate sector while consumers and small and medium enterprises (SMEs) are underserved.
SBP report underscores the need for providing legal cover to protect and enforce the intellectual property rights, including copyrights, patents, industrial design, trademarks and geographical indications to promote public trust and promote a fair competition. Export growth due to this is hampering growth in three industries namely: cotton textiles, basmati rice and computer software. Absence of IPRs is keeping companies from developing superior variety of cotton seeds thereby denying yield gains. Basmati exports from Pakistan could be wiped out if an Indian application (filed five years ago, now under litigation) is granted. The WTO members are required to give protection to goods having geographical indication under the TRIP agreement. Peshawari chappal, Multani halwa, Kasuri methi, and Hala''''''''s Ajrak can be protected when exported, if Pakistan enacts GI laws, says SBP. The SBP report says that incomplete and outdated legal framework is restricting both local and foreign investment in the field of information and computer technology.
A Press release issued by SBP on Friday says: "State Bank of Pakistan today released Annual Report on the State of the Economy for the year 2014-15. According to the Report, Pakistan''''''''s economy did reasonably well during FY15, in contrast to a number of other emerging economies that are facing slower economic growth. The real GDP growth increased to 4.2 percent in FY15, and key macroeconomic indicators like inflation, fiscal balance and current account balance recorded improvements.
The Report emphasises on the improvement in the external sector given its significant positive spillover to the rest of the economy. The external account improved due to a robust growth in worker remittances and a sharp decline in global oil prices. As a result, not only country''''''''s FX reserves reached an all-time high level of US $18.7 billion by end-June 2015 (sufficient to finance around 5 months of the country''''''''s import bill), the exchange rate also remained stable during the year. More importantly, the improvement in the external account significantly diluted the global risk perception for Pakistan.
The Report further explains that the stable PKR parity kept CPI inflation under control, and lowered inflation expectations in the country. However, the significant reduction in CPI inflation during FY15 was caused primarily by a sharp decline in oil and other commodity prices. The average CPI inflation fell from 8.6 percent last year, to only 4.5 percent in FY15. A stable outlook of inflation and balance of payments allowed policymakers to implement pro-growth strategies. For example, SBP cut its policy rate by a cumulative 350 bps during the year to boost investment activities. Similarly, on the fiscal side, development expenditures by the government remained strong through most of the year, focusing mainly on infrastructure development.
While the Report recognises the fiscal consolidation efforts of the government in terms of controlling expenditure, it also points out structural weaknesses in tax collection. A sharp decline in oil prices and subdued manufacturing activities during the year had made already sluggish tax collections more difficult. The provincial budget surplus also recorded lower than the last year.
In order to finance the budget deficit, the government relied heavily on commercial banks, the Report says. However, encouragingly, the government retired a large amount of its debt to SBP. In the meantime, SBP continued liquidity injections to ensure adequate supply of loanable funds for the private sector. Working capital utilisation declined due to drop in commodity prices. A redeeming feature has been the increase in long term financing which indicates new investment in plant and machinery. Nevertheless, the overall credit to private sector remained lower than that in the previous year.
According to the Report, country was able to marginally reduce its public-debt-to-GDP ratio mainly due to revaluation gain from US Dollar appreciation against major currencies. The reduction in debt burden was realised despite the successful launch of 5-year Sukuk bond in November 2014, which allowed the government to raise US $1.0 billion against the initial target of US $500 million.
While the report welcomes positive developments in the economy, it reiterates several long standing structural constraints (for example, low investment rate, low tax-to-GDP ratio, and continuing energy shortages) that continue to hinder a sharp economic recovery. The Report recognises that the improvement in macroeconomic conditions and security situation offers an opportunity to address structural impediments to economic growth on priority basis. Furthermore, the Report emphasises on the need to pursue an effective and well-co-ordinated industrial policy to expand industrial and export base. Increasing exports is critical for resolving FX constraints to growth. "
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