State Bank is optimistic about the country's prospects of returning to macroeconomic stability, with most of the key indicators continuing to show positive trends in the recent months, but there are fault lines, which could hold back the recovery process and undermine the growth potential of the economy.
In its quarterly report released on 12th January, the SBP has projected a higher growth rate of about 3.3 percent for FY10, as compared to 2.0 percent in the preceding year due largely to some recovery in the large-scale manufacturing sector. Other positive factors likely to support economic stability are a sharp reduction in inflation, contained government borrowings from the SBP, substantial contraction in external imbalance, stability in the rupee-US dollar parity and easing of the monetary stance.
However, the State Bank seems to be quite concerned about the persistence of weaknesses in certain other areas. It has stressed the point that "the drop in overall volume of trade, poor tax growth, risk of lower than expected aid receipts and, in particular, a rise in the fiscal deficit, highlight the fragility of improvement and pose continuing risk to the recovery."
The State Bank has also not minced words when flagging the vulnerabilities of the economy. It says that the latest increase in the price indicators may be an indication of growing inflationary pressures in the economy. This has allowed the SBP to undertake only a measured easing of monetary policy.
The central bank has also talked very frankly with regard to the uncertainty attached to the current high inflow of remittances and the impact of the war on terror on the fiscal outcome. It has recognised that reasons for strong improvement in remittances in the recent past are still unclear, raising questions on the sustainability of the trend.
Whether this positive development was only due to one-off transfers, a structural shift or on account of steps by the central bank to facilitate remittances through official channels could only be guessed. The crackdown by the FIA against two leading exchange companies has certainly helped operations against militants in some northern regions of the country that has put pressure on the budget and this together with greater quasi-fiscal activities has increased the risks to macroeconomic stability.
Looking forward, a major challenge facing the economy is to improve the tax-to-GDP ratio. Only a marginal increase in tax collections during the current year so far, is a source of concern and if this trend continues, Pakistan's tax-to-GDP ratio will decline from an already low 9.8 percent seen in FY09.
It was, therefore, "necessary to strengthen the capability of the FBR, increase documentation, reduce exemptions, [allow] equal treatment of incomes from different sources, and accelerate the levy of comprehensive VAT". Another problem was the increasing level of contingent liabilities of the government. The loans of TCP and PASSCO also need to be settled before they create another circular debt problem.
Excessive government involvement in commodity/trade finance and the interference in the market price setting can be counter-productive and should be avoided. The transfer of public sector enterprises debt to the budget for repayments has an ominous danger for the future. We feel that the tone of the State Bank's quarterly report is somewhat different this time.
Although, assessment of the economy, as usual, is quite objective, it is not difficult to realise that the State Bank is now very incisive in its comments and has, more or less, abandoned the previous an approach, which was often described by some analysts as "crafty". This change may be due to the desire of the central bank to draw greater attention of the authorities to the growing vulnerabilities of the economy which, if not addressed in time, could prove to be more harmful in future.
Anyhow, the expectation that the rate of growth, during FY10, would be higher than last year's, though welcome, may not be very exciting for all and sundry because of the likelihood of almost a negligible impact on the quality of life of ordinary people.
In fact, factors like emerging inflationary pressures, rampant unemployment and growing lawlessness in society could further add to the hardships of the majority of people. The risks highlighted by the State Bank, such as a rise in fiscal deficit and drop in overall volume of trade are very real and could prove very damaging for the economy in the long-run.
War against terrorism is also taking its toll, both in terms of human lives and financial resources. It is quite clear that it is not easy for a country like Pakistan to afford such ventures for a considerable length of time. The State Bank's emphasis to meet the challenge of raising tax-to-GDP ratio and its reference to the uncertainty surrounding the current trend in remittances is also very relevant.
The stress on the avoidance of interference in market price setting in the present environment was also necessary due to obvious reasons. Such a policy approach is not only economically unjustifiable, but also adds to the difficulties of the common man by forcing him to buy essential commodities from the black market at higher rates.
Clearly, there can be hardly any arguments about the pertinence of issues raised by the State Bank, but the real problem is the inability of the government to rise to the occasion and the general apathy of the public to support the government at this crucial juncture.
In fact, the people of the country, by and large, are clamouring for more concessions and the government authorities are making a beeline for foreign capitals to get more loans and assistance when the need of the hour is to make more sacrifices and raise a much higher level of domestic resources to reduce dependence on foreign flows.
Our major concern, especially at this point of time, is that the helmsmen are either not realising the gravity of the situation or are not finding time to give due consideration to the growing risks to the economy. The Finance Minister, at times, makes the right noises, but these are generally buried under the weight of political expediency.
Ways are also often found to ignore the advice of the IMF, despite its programme with the country. To be honest, the State Bank could only raise its voice and register its concerns at various forums, but cannot dictate policy in areas that don't fall in its domain. Hopefully, constant nudging of the government to give utmost priority to improve the economy and reduce the associated risks would yield the desired results before the loss becomes irreparable.
Comments
Comments are closed.