The central banks third quarterly report for FY14 is out, and their headline is that Pakistans economy "appears" to have turned a corner during the third quarter of FY14, and sentiments about the economy "seem" to have improved. Do these inverted commas reflect typical central bankers speech, or is it that the SBP is sitting on a fence.
One may never know the answer to that question, for its always debatable as to what the SBP might actually be thinking. But, here are a few of its relatively concrete observations. "It must be said that these signs of improvements should not discount the challenges faced by the economy; and efforts for much needed structural reforms should continue," the SBP said.
On the subject of LSM growth, the SBP echoed what this column had earlier opined (See BR Research column: The LSM mystery June 12, 2014) that it simply is not broad based. "This uneven growth can be traced to structural imbalances that need to be addressed," the report said, while casting doubts over the ability to achieve full-year LSM growth of 5.3 percent estimated by the government.
The SBP says that total public debt (external plus domestic) has already crossed the limit of 60 percent of GDP, set by the Fiscal Responsibility and Debt Limitation Act (2005) for FY13 onward. "Hence, any addition to the external debt should at least be matched with an equivalent reduction in the domestic debt outstanding."
In perhaps one of its most vocal statements, the SBP has shown serious concern over corruption in public spending. "The importance given to transport and construction at the provincial level is also intriguing. While the differences in sub-national development priorities can be attributed to individual provincial needs, a review of literature on the determinants of public spending provides another perspective," the SBP said.
Citing a set of multi-year academic studies from across the world, the SBP said that the composition of government spending is often shaped by the degree of inefficiencies and wastages of financial resources in a country. The types of government expenditure that creates opportunities for bribe taking and other types of rent seeking behaviour are often prioritized when governance is poor. "As a result, investments in huge projects (buildings, highways, airports, etc.) attract more public funds compared to social sector."
One study cited by the SBP proves that corruption plays an important role in distributing government spending between various sectors. "Specifically, it (corruption) favours spending on defense, fuel, public services, law and order at the cost of spending on social sector."
This thesis surely seems familiar to Pakistan. But, interestingly, going by this thesis, KPK and Punjab are competing head to head on possible corruption in government spending, whereas the oft blamed Sindh is faring better (see graph).
While SBPs third quarterly report talks about how rupees appreciation might affect remittances (See coming Mondays columns for detailed commentary), it fails to delve into on how rupee appreciation would impact Pakistans trade balance going forward.
The only thing the report said on the subject is that a part of the loss of competitiveness "could be offset by the availability of cheaper imported inputs, which most Pakistani exporters are dependent upon". For a subject so complex and hotly debated in political and economic circles, one would expect the SBP to shed more light on it than just two lines.
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