EDITORIAL: State Bank of Pakistan (SBP) uploaded two reports – one a statistical compilation of macroeconomic data and the Governor’s annual report 2023-24, which ended on 30 June 2024 with a foreword titled “Governor’s Remarks” followed by the report that provides an analysis by the apex bank team.
The statistical compilation notes a real Gross Domestic Product (GDP) growth of 2.5 percent in 2024 (against 0.2 percent in 2023) on the back of 6.4 percent agriculture growth rate (against 2.2 percent the year before), 1.1 percent industry (against 3.7 percent in 2023) and 2.2 percent in services sector against 0.02 percent the year before.
While critics of former finance minister Ishaq Dar may well point to improvements in 2024 against 2023 as indicative of a tacit acknowledgement by all stakeholders that his policies were toxic to the country’s economy and lowered the bar too much but the focus must now shift to two disturbing factors notably: (i) the growth in farm output in 2024 was expected after the devastating floods the year before; however, this growth may be severely limited as the two economic team leaders — Governor SBP and the Minister of Finance — have pledged to the International Monetary Fund (IMF) under the ongoing 37-month programme to take action “while noting the importance of food security, we recognise that the government’s large-scale interventions in markets for agricultural commodities, including fertilizers, are no longer fit for purpose.
They have created distortions stifling private sector activity and innovation, exacerbated price volatility and hoarding, and placed fiscal sustainability at risk…to set expectations for the 2025 kharif crop season and minimise disruptions, we will lay out our strategy for the transition arrangements by end-September 2024; and (ii) industry performed more poorly in 2024 compared to 2023 with the Fund staff maintaining that “Beyond weak exports Pakistan has struggled to innovate and develop production of more sophisticated export goods…persistent policy-induced resource misallocation (is) hampering the incentive to invest and enhance TFP by locking resources in low productivity sectors.
Resource misallocation is immediately clear from the entrenched, persistent differences in labour productivity across sectors.” This opinion accounts for the pledge by our authorities to end concessional funding and tariffs for specific industries and pledged to “refrain from providing new fiscal incentives to any new or existing Special Economic Zones, and will not renew existing ones, as SEZs are meant to be temporary solutions to pre-existing constraints in the business environment. They will also refrain from creating new SEZs or EPZs going forward.”
There is little doubt that as this pledge comes into effect industrial output may be further compromised that would in turn have negative consequences on this sector’s projected growth this year as well as on the GDP growth rate for 2025.
What is also significant is that the government was compelled to commit to “ensuring that the Special Investment Facilitation Council does not propose, nor that the government will provide, regulatory, spending, or tax-based incentives of any sort, or any guaranteed returns, or take any other action that could distort the investment landscape. We will also establish a set of best transparency and accountability practices for SIFC operations and ensure that all investment made under the SIFC results from the standard Public Investment Management framework.”
The Governor’s foreword acknowledges that “total deposits of banking sector grew strongly on the back of elevated interest rates and SBP’s efforts towards financial inclusion and digitalisation of payments. This contributed to a decline in currency in circulation to deposit ratio.
Owing to government’s increased reliance on domestic banks to finance the budget deficit amid shortfall in external financing, banks invested these deposits in government securities as demand for private sector credit remained low in FY 204” - which also accounts for low industrial growth.
The foreword claims that “banking sector’s capital adequacy ratio, assets quality, and liquidity indicators also improved, enabling the country’s financial sector to maintain overall financial soundness.” The economic team leaders pledged to the Fund “to avoid conflicts of interest arising from SBP’s ownership of financial institutions, we will redouble our efforts to liquidate or transfer those interests to government by end-FY25.
Further, we are concerned that most Development Financial Institutions are not primarily focused on their development finance mandate but have strayed principally into investments in government securities. Consolidation of the sector and a redesign of the DFI business model, supported by a revised regulatory regime ensuring compliance with their mandate, bears much potential to support Pakistan’s medium-term growth.”
And needless to add, also committed to “take the appropriate actions from our forthcoming assessment of the CDNS (national savings centres) towards ensuring that the public sector neither duplicates functions of private institutions nor inhibits growth and innovation therein, especially considering that more and more Pakistanis are served by banks and gain access to market-based saving opportunities.”
This envisages curtailment of CDNS deposits by the government and will perhaps push the country towards a much higher than the budgeted fiscal deficit.
It is to be expected that while the SBP and the Finance Division are highlighting improvement in statistics due to the implementation of the conditions of the ongoing Fund programme the Fund itself has rated risks to the programme as high given that “overall risk of sovereign stress is high, reflecting a high level of vulnerability from elevated debt and gross financing needs and low reserve buffers;” it has also rated medium-term risks as high (that include uneven programme implementation, political risks, and access to adequate multilateral and bilateral financing in view of the high gross financing needs,” while the long-term risks are naturally rated moderate as in that time period it is assumed that the authorities would have implemented nearly all politically challenging conditions.
Copyright Business Recorder, 2024
Comments