The State Bank's quarterly report for the period July-September, 2015 released on 18th January, 2016, contains a comprehensive view of the economy together with its prospects for the remaining part of the current fiscal. The report notes that notable improvements were witnessed in the key macroeconomic indicators but much needs to be done to ensure their sustainability. Economic activity seems to be gearing up with the improvement in LSM. "Further, the current account deficit narrowed, which was comfortably financed by higher financial inflows; the country's FX reserves recorded all time high levels, and were sufficient to finance import bill of seven months; fiscal deficit was reduced, along with a shift in its financing away from SBP; and inflation remained on low trajectory". Taking comfort from visible macroeconomic environment, the central bank started monetary easing in FY15 that continued during the first quarter of FY16.
Although these were positive developments, everything was not hunky-dory. Although the budget deficit during the quarter was lower than last year, tax collections, however, did not achieve the required growth. Dwindling exports continued to eclipse healthy performance of the external sector. More worrying was the fact that a decline in exports was primarily attributed to lower quantum and exports recorded declines for the 3rd quarter in a row. In addition to exports, FDI also needs to contribute more towards external sector sustainability. While the FDI from China was likely to increase due to progress in various infrastructure projects under the China-Pakistan Economic Corridor (CPEC), the country requires more foreign investment in exportable sectors. Extreme weather conditions in recent years had increased vulnerability of Pakistan's agriculture sector. Kharif crops (cotton and rice) had suffered from excessive rainfall. Nonetheless, it was encouraging that 9th review of the IMF programme had been completed successfully and several important reform measures such as Monetary Policy Committee and Credit Bureau Act had been introduced but slow progress on privatisation process and persistent distribution and transmission losses in the power sector remain a challenge.
As regards prospects for FY16, a boost in the construction and allied industries was expected due to progress on projects under the CPEC. LSM sector was likely to benefit from improvement in security conditions, better availability of electricity and gas, lower cost of industrial raw materials and historic low interest rates. While the service sector paints a mixed picture, agriculture sector was passing through a bad patch. Farm incomes had also taken a hit due to persistent low prices of agricultural products and the losses inflicted by bad weather. Cognizant of these hardships, the government had introduced the Kisan Package which was likely to ease financial constraints of small agriculturists to a certain extent. Overall, the GDP growth rate during 2015-16 is likely to be in the range of 4.0-5.0 percent compared to the target of 5.5 percent. Current account deficit is estimated to be in the range of 0.5-1.5 percent of GDP as against the target of 1.0 percent while fiscal deficit is likely to be 4.0 - 5.0 percent of GDP compared to the target of 4.2 percent. With a protracted slump in global commodity prices, CPI inflation is also likely to be contained within the range of 3.5-4.5 percent compared to the target of 6.0 percent.
We feel that the contents of the State Bank's quarterly report are quite objective and to the point. Although the report contains various macroeconomic gains witnessed in the economy during the first quarter of 2015-16, the vulnerabilities of the economy have also been highlighted in an equal measure. While gains in the form of positive trend in variables like narrowing of fiscal deficit, a lower current account deficit, a record level of foreign exchange reserves and containment of inflationary pressures are a matter of record, the real contribution of the SBP is in highlighting the emerging weaknesses of the economy. For instance, the real sector was not likely to show an appreciable improvement due to low prices of agricultural products and inclement weather conditions. The package offered to the farmers is also not expected to yield high dividends due to its limited coverage and poor weather conditions which are likely to persist in the foreseeable future due to climate change all over the world. The SBP is also concerned about a continuous decline in exports in the recent past, low tax collections, etc. Sadly, these aggregates are also not likely to show an improvement in the near future. Exports are suffering not only due to lower international prices and suppressed domestic production but an overvalued exchange range which the top authorities of the government insist to maintain. The worrying aspect is that the external position of the country seems better due mainly to the CSF inflows, assistance from IFIs, including the IMF, and bond issues by the government in the international market. Such factors that are contributing to the improved balance of payments position at present are not permanent or sustainable in nature. As far as fiscal position is concerned, the government has introduced an amnesty scheme to broad-base the tax net, but its utility is also likely to be limited. In fact, the government needs to undertake bold measures to mobilise higher level of revenues but it is not prepared to take that route due to stiff opposition from the opposition parties and vested interests as well as certain political imperatives. Loss-making PSEs are also a huge contingent liability on scarce financial resources which would not remain contingent for long. The privatisation process is still in limbo due to the tough opposition of political parties and trade unions but needs to be expedited to improve quality of services and stem losses to the exchequer. The phenomenon of circular debt would raise its ugly head once again to cause huge losses to the exchequer while distribution and transmission losses are not easy to control.
While there can hardly be any argument against the pertinence of issues raised by the State Bank, the real problem is the government's inability or unwillingness due to lack of political will to take the necessary measures and the absence of support of public and opposition parties to government at this crucial juncture. In fact, people of the country are generally clamouring for more concessions and the government is making untiring efforts to get more and more loans from a variety of sources when the need of the hour is to generate the much higher level of resources from within. Ways are also devised to ignore the advice of the IMF or obtain waivers from commitments made to the Fund under its programme with the country. Sometimes statistical data is also manipulated to keep the Fund staff in good humour. For example, some of the well-known economic analysts of the country do not agree with the fiscal data provided to the IMF and argue that the level of budget deficit is higher than reported to the Fund staff. The country obviously cannot be on any sound footing unless and until the budget is properly balanced by putting in the necessary efforts to remove the external sector deficit without resorting to heavy loans and assistance from outside sources and, GDP growth rate is raised substantially through domestic resource mobilisation. Sadly, the government seems to be more concerned with other issues rather than such mundane matters at this juncture. Nobody is even talking about proper population planning which is badly needed at the moment keeping in view limited resources of the country and increasing poverty. Overall, however, the SBP's quarterly report seems to be well-balanced and provides a lot of information and background material to policymakers and analysts in the country. It would also improve the awareness level of those who are well-equipped with the basics of economics and care to read the report.
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