WEB DESK: State Bank’s second quarterly report for the year 2015-16 released on 31st March contains, in general, an objective assessment of country’s economy together with the prospects for the current fiscal and draws attention to the need to undertake necessary policy measures in certain key areas of the economy. Giving a somewhat positive spin to the developments, the SBP says that “improvements in some of the macroeconomic indicators seem visible.” LSM growth had improved in the first half of FY16, losses in crop sector were now expected to be modest and early signs for services sector were positive.
This was due to supportive policy environment while macroeconomic stability – as reflected in subdued CPI inflation, adequate FX buffers, stable exchange, low current account deficit despite a sharp decline in exports and an improved fiscal position had set the base. However, rising uncertainty in the global economy and financial markets continues to deflect otherwise buoyant sentiments in the domestic economy. For Pakistan, the prevailing global conditions have both positive and negative effects. A decline in oil prices has allowed a 39.8 percent fall in the country’s import bill and the pass-through of low oil prices has contributed in pushing down the CPI inflation to a multi-decade low. Low inflation expectations and stability on the external front allowed SBP to cut the policy rate to its historically low level of 6 percent in September, 2015. This had spurred demand for private sector credit, especially for fixed investment purposes.
As for the outlook for FY16, it appears stable. Growth is likely to pick up, fiscal position is strong, inflation is likely to stay low and risks on the external front are moderated to a large extent. SBP had accumulated an adequate amount of liquid FX reserves over the past couple of years which could comfortably finance twice as much payments (gross) as were expected for the next 12 months. Debt servicing obligations are within manageable levels, there are no major risks on the inflation front in the short-term and improvement in the fiscal position is likely to be maintained in the second half of the ongoing year. Stable macroeconomic environment means that economic growth would maintain the momentum.
Pakistan, according to the SBP, could scale up its growth rate by expanding its export base and attracting more FDI into the country. In order to make growth more sustainable, the cost of production and doing business has to be brought down, energy supplies must be smoothened further and export-friendly industrial policies have to be laid out. SBP is of the view that structural weaknesses are generally being worked on and important reforms are being introduced. However, in order “to make an effective contribution in optimising productivity gains in times of global downturn, government needs to further expedite the required reforms in the fiscal and energy sectors.”
We feel that though State Bank has painted a rather rosy picture of the state of economy, yet it is difficult to argue against most of the observations contained in the report. The reason behind such an approach could be greater autonomy granted to the SBP under the revised Act and the availability of latest economic data due to the delayed release of the report. It is true that halfway through the year, prospects of economic growth appear to be better than in the recent past, inflation is down, credit to the private sector has risen, fiscal and current account deficits have narrowed somewhat, exchange rate is stable and FX reserves are quite adequate. In our view, more important is the fact that militancy in the country has been contained due to a bold stance of the government and the country has been able to be on the right side of the International Financial Institutions, particularly the IMF, which has paved the way for foreign inflows from other sources.
Such a policy stance was required to restore the confidence of local and foreign investors and accelerate growth process to reduce unemployment and poverty in the country. However, most of the gains are either too small to make a significant impact on the economy or owe their origins to exogenous developments. For instance, deficit in the current account has been only marginally reduced, fiscal imbalance is still large and the growth rate, though likely to be somewhat better than last year’s, is not enough to make a meaningful increase in the per capita income and improve the quality of life of ordinary citizens. Besides, foreign developments like a drastic reduction in the international prices of oil and other commodities have not only benefited the external sector but subdued the inflationary pressures. Needless to say that international economic and financial developments are beyond the control of the government and as such are not sustainable to help the economy over the long run.
Also, the SBP seems to be giving more credit to the government for implementing reforms than it deserves. For instance, the report notes that structural weaknesses are gradually being worked on and important reforms are being introduced. In this regard, the SBP says that the cost of tax exemptions has been reduced, the number of personal income tax filers has increased, an independent Monetary Policymaking Committee (MPC) has been constituted and the Credit Bureau Act, 2015 has been promulgated. In our view, these reforms are not going to make a significant impact on economy as most of the potential taxpayers are still outside the tax net and an independent MPC is hardly going to make much difference until the government stops interference in the monetary policy affairs and the SBP management has the will to act independently.
Honestly speaking, it looks very difficult for the government at this stage to introduce reforms which could really help. For example, the recent efforts to privatise PIA and widen the tax net through Voluntary Tax Compliant Scheme have failed to achieve the desired results. Another omission of the report is to amply highlight the decline in exports which could be a highly negative development for economy in the years to come. It is not an ordinary development that exports have slumped by another 14.5 percent in the first half of FY16. Pakistan’s exports to the EU have fallen by 11.93 percent to dollar 6.13 billion during January-November of 2015 from dollar 6.96 billion in the same period last year, indicating that even the preferential market access (GSP+ scheme) has failed to boost dwindling exports.
It should evidently be a matter of great concern but the government continues to withhold exporters’ refunds amounting to billions of rupees and is highly reluctant to readjust the exchange rate of the rupee. The consequences of such a flawed policy would be more evident when home remittances and foreign inflows would either stagnate or decline – which is not far-fetched. Overall, however, we feel that the quarterly report would be a valuable document for policy planners and other analysts.
The effort of the SBP needs to be particularly appreciated when almost all sources of the government give only a one-sided picture of economy. The addition of a section on steel sector would also be useful for academia and researchers. Such an exercise may be continued for an in-depth analysis on topical subjects. Similarly, the report highlights the causes of poor saving rate and the gap between investments and savings that needs to be filled by FDI. The government needs to ponder and take action to effectively address these causes.
Source: Business Recorder