Net credit expansion to the private sector is entirely on account of working capital due to increase in input costs indicating that private credit off-take has contracted, says the State Bank of Pakistan. In its first quarterly report for financial year (FY11), issued on Wednesday, SBP said: "the combination of increasing NPLs and high risk-adjusted returns on government paper is clearly crowding out more productive private sector activities."
SBP feels that all proposals, ie, RGST, wealth tax, extending income tax on agri-incomes, imposing a temporary windfall tax as a one-off on some crops whose ex-farm prices have gone up by an extraordinary level, levying capital gain tax (not merely on financial assets) and improved tax governance - needs to be implemented to ensure widening of tax base - thereby allowing lowering of average tax rate in the economy to improve tax competitiveness.
SBP emphasised that increased fiscal resources are necessary for macro-economic stability to increase development spending (health education etc). VAT-based tax is essential not as a revenue item but to give economic agents an incentive to document their transaction-leading to higher income tax collector, the report added.
SBP fears that the current account deficit (CAD) is likely to deteriorate in the January to June, 2011 period. Stronger growth in imports is envisaged to offset the gains from rise in exports and workers remittances. The financing of CAD will be challenging as inflows under financial accounts are likely to be significantly lower. In this perspective, argues SBP, the continuation of structural adjustment programme of IMF would be helpful in softening the external financial constraints, as well as to enhance the resilience and robustness of the economy.
SBP forecasts easing of food inflation in the second half of the fiscal year; it is though unlikely to approach single digit in FY11. Moreover, says the report, rising international commodity prices and fiscal measures (to raise revenues, reduce energy subsidies etc) would spur the rise in non-food inflation. SBP points out that in this context it becomes even more important for policy makers to ensure that demand-pull inflationary pressures are kept to a minimum.
SBP estimates that the consolidated fiscal deficit is expected to be higher by 1.6 percent of GDP instead of lower 1.6 percent in FY11 over FY10 - agreed with the fund. This would imply 0.1 percent of GDP higher than last year's figure. SBP's forecast for growth remains unchanged from initial post-flood assessment for FY11. Real GDP growth would be in range of two to three percent.
The capital and financial account receipts have fallen from $3 billion to $887 million. For the next six months the situation took grimmer: due to fall in flood related receipts; increase in commodity prices, especially for energy. Failure to make substantial progress in economic reform could continue to weigh upon external capital and financial account receipts, the central bank warned.