Pakistan’s
central bank, State Bank of Pakistan (SBP) has recently released its Annual
Report for the financial year ended 30th June 2016. The Report is full of praises
of the economic managers for achieving targets under prevailing difficult
circumstances. However, it also highlights the serious problems facing the
country. The bottom line is that unless right structural reforms are undertaken
the country may once again plunge deeper in serious crises, worst being balance
of payment crisis. I would talk about praises later as I consider it my ardent duty
to first highlight the problems facing the country.
Notwithstanding
these positive macroeconomic stability gains, the Report highlights some
challenges as well. Firstly, the current level of private investments and
savings in the country needs acceleration to keep pace with required investible
resources. Secondly, structural issues in the export industry need to be
resolved. Thirdly, the reliance of the tax system on stop-gap measures is
creating distortions in the economy. Finally, the country needs to spend more
on social sector development to address social issues.
The Report,
considers Pakistan to be well positioned to address these challenges. It
anticipates all-important support coming from a stable macroeconomic
environment and growing investments in CPEC-related projects. These would help
improve the existing infrastructure and power supplies to businesses. Some
analysts don’t agree with this rationalization.
The Report
recognizes the positive impact of improved macroeconomic environment, better
energy supplies, and subsiding security concerns. The central bank believes
that in addition to CPEC, economic activity would benefit from pro-growth
policies. It specifically says that the current policy rate, at a historic low
of 5.75 percent has made funding easier for businesses and consumers.
Similarly, growing development spending, despite a planned reduction in budget
deficit, would continue to support infrastructure-related industries. One also
tends to disagree with this because bulk of the deposits are being invested by
commercial banks in government securities rather than extended to private
sector.
The Report
further explains that though some macroeconomic indicators were short of
targets, they still posted better performance over the last year. For instance,
real GDP growth of 4.7 percent during FY16 was below its target, but
nevertheless higher than the growth achieved a year earlier. Meanwhile, the
accumulation of the country’s foreign exchange reserves reached an all-time
high level at end FY16; the exchange rate remained stable; and CPI inflation
fell to only 2.9 percent during the year. Similarly, fiscal consolidation
remained on track, and the budget deficit was reduced to 4.6 percent of GDP –
the lowest since FY07. All this is not due to any good policies adopted by the government
but lower international prices of crude oil.
The
government envisages a GDP growth of 5.7 percent for FY17. The current account
deficit is likely to stay in the range of 0.5 – 1.5 percent of GDP during the current
financial year. The Report draws attention to the IMF program’s contribution in
restoring macroeconomic stability and confidence of international creditors.
Crucially, it maintains that the reform process – related to energy-sector,
loss-making PSEs (like PSM, PIA), and business-friendly regulations – must
continue after the IMF program’s completion.
Finally, the
Report reiterates that without private sector participation, it will be hard to
achieve a higher and sustainable growth that is built on the pillars of
entrepreneurship, innovation and competitiveness.
The detailed
Report is available at SBP website www.sbp.org.pk
