SBP for further structural reforms for sustainable growth

The State Bank of Pakistan (SBP) has emphasized for further structural reforms to ensure that the stabilization measures lead to a sustainable growth path for the country.

According to SBP's Second Quarterly Report for FY20 on "The State of Pakistan's Economy", the stabilization efforts and regulatory measures yielded notable improvements during the first half (July-Dec) of FY20. However, further improvements will require deep structural reforms to put the economy on a firm path towards sustainable growth. In effect, greater policy vigilance and more vigour are required for the needed transition from stabilization to growth, it added.

The report said the current account deficit contracted to a six-year low, foreign exchange reserves increased, the primary budget recorded a surplus, and core inflation eased. Importantly, export-based manufacturing showed signs of traction and construction activities picked up, indicating that the economy was on the path of recovery. Progress under the IMF programme remained on track and the credit rating agencies maintained their stable outlook for Pakistan during the review period.

In case of balance of payments, the report noted that the improvement in current account mostly stemmed from a reduction in the import bill with some contribution from export earnings. Depressed international commodity prices had partially offset the gains in export volumes offered by a competitive exchange rate. With the exception of the telecommunications sector, foreign direct investment (FDI) inflows were also about the same level as last year. The report emphasized that reforms needed to be prioritized to attract and sustain higher FDI inflows into the country.

Regarding the fiscal sector, the report noted that the primary budget recorded a surplus, while the fiscal deficit was contained during H1-FY20 compared to the same period of last year. This was due to a significant growth in revenues despite a slowdown in the economy and the compression in imports.

The reversal of earlier tax concessions and implementation of new levies helped increase the revenue collection. Nonetheless, the overall revenue target was missed, highlighting the scope for greater efforts to broaden the tax base and increase documentation in the economy, the report added.

The report further highlighted the challenges pertaining to the agriculture sector. The sector appears less resilient to challenges like constrained water availability and climate change. The cotton crop, in particular, was hit by unfavorable weather, pest attacks and low water availability. Though the prospects for the wheat crop and livestock are encouraging, the decline in cotton production is likely to undermine the agriculture sector's performance in FY20. On the inflation front, the report noted that the inflationary pressures continued to build up throughout the first half of FY20. While the non-food-non-energy (NFNE) inflation exhibited stability amid subdued demand conditions in the economy, food inflation surged steeply in both the quarters.

Given that the surge in inflationary pressures was mostly an outcome of supply disruptions, which are typically seasonal and temporary and core inflation did not rise by a commensurate amount, the SBP's projections for the average headline inflation for FY20 remained broadly unchanged at 11-12 percent.

The report emphasizes that the ongoing efforts must be complemented with further structural reforms to ensure that the stabilization measures lead to a sustainable growth path for the country. In this regard, the Special Section of the report identifies the state of competition in the domestic economy as an area needing attention of the policymakers. It assesses the current state of competition in the country, and highlights the importance of competition in achieving economic growth and price stability. The section argues that the overall competitive environment in Pakistan has been unfavorable for productivity enhancement and growth. In this context, a rethinking is needed with respect to the regulatory structure of the economy.

According to report, the role of the public sector should generally be limited to addressing market failures through structural reforms, and only providing broad institutional support to businesses. Where targeted interventions are inevitable to support activity in the presence of market failures, it may be ensured that these do not become entrenched.