Gross fixed investment has declined from 22.05 percent of GDP to 13.4 percent in the past four years and the investment rate is at its lowest in four decades. This has a profound implication for future growth and job creation for a labour force growing at an exuberant rate of almost 4 percent.
Bleak law and order situation, chronic energy shortage and excessive reliance of government on commercial banks for financing is crowding out private credit and low saving rates are chief reasons for this fall.
The impact of war on terror on economy is increasing many bounds - estimated costs of war have increased from $2.7 billion in FY02 to $17.8 billion in FY11. Within this head, cost of foreign investment, industrial output and uncertainty are cumulatively estimated at $6.7 billion (3.2% of GDP) in FY11 whereas total cost of war is calculated at 8.5 percent of GDP. So the investment levels could have been higher by around 2-3 percent of GDP had we not been involved in this conflict.
How and when would this war end is a difficult question and cannot be predicted but ground realities are that full-fledged operation in North Waziristan is a good omen and although costs may escalate at its initiations, they will eventually decline given a successful conclusion of this operation.
The energy shortage and misallocation of energy sources, mainly gas; as well as bad management of generating and distributing companies are not only hindering new investment but also worsening the fiscal balance which is, in turn crowding out the private investment and raising borrowing costs.
Practical proposals from the business community have received the tacit approval of the government to resolve the energy crises. But actions have not followed words in this regard. Beating this crisis requires multiple steps including rationalisation of tariffs, imports of LNG, reduction in differentials in prices of various fuels, the corporatisation and privatisation of GENCOs and DISCOs and greater efficiencies in existing generation plants in public sector both in hydrocarbon and hydel accelerates; along with launching of new, efficient projects in the power sector.
War and energy woes can and may subside with the passage of time. Once the dust settles, this strain on fiscal house will disappear and bring sanity on deficit numbers with more spending going towards development to achieve the objectives of the new growth strategy.
On lower saving rates of economy - national savings nose-dived from 20.8 percent of GDP in FY03 to 13.8 percent in FY11 - the biggest impediment is banks inadequate performance in the role of financial intermediary. State bank is cognisant of this fact and is repeatedly saying it in different publications.
The regulator has soon to ponder on the essence of PLS (profit and loss sharing) nature of demand liabilities. After all, the state of profit sharing is dismal given that the five largest banks offered about 20 percent returns to shareholders in CY10 while the returns to customers holding savings accounts amounted to a mere five percent.
Nonetheless, the removal of service charges on saving accounts by SBP, reduction in the withholding tax on cash withdrawals of transactions over Rs25,000, making investment in government papers for resident and non-resident individuals compatible to national saving schemes and efforts to reduce magnetisation of fiscal deficit may help in reducing currency in circulation. However, more efforts are required by banks to reach the booming rural segment of economy.
MONEY AGGREGATES:
The government is effectively taking the ceiling of SBP borrowing at September-end level (Rs1290 bn) as a floor since borrowing has persisted above this limit. After the reduction of Rs71 billion in central bank's borrowing for the week ending May 21, on cash basis, the government was missing this target by Rs35 billion.
This reduction in high power money creation last week shifted borrowings to the commercial banks as government borrowing toll towards latter surged by massive Rs76 billion during the third week of May. This can and is crowding out the private credit which increased its borrowing by a mere Rs5 billion to reach Rs113 billion for the year to date.
With no significant change in currency in circulation and demand and time deposits, the overall money supply increased by mere Rs8 billion to reach Rs667 billion (11.72 %) for the year so far, compared against Rs456 billion (8.87%) in the same period last year.
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KEY MONETARY AGGREGATES AS ON MAY 21
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Rs (mn)
21-May 14-May Change
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Currency in Circulation 246,513 255,455 (8,942)
Total Demand & Time Deposits 427,072 409,792 17,280
Broad Money (M2) 677,191 668,943 8,248
NFA 184,576 172,756 11,820
NDA 492,617 496,186 (3,569)
Net Government Borrowing 544,640 512,531 32,109
Borrowing for budgetary support 614,212 608,883 5,329
from SBP 146,806 217,687 (70,881)
from scheduled banks 467,406 391,196 76,210
Commodity operation (73,783) (100,573) 26,790
Credit to non-govt sector 127,055 118,446 8,609
to private sector 112,953 107,494 5,459
to PSEs 13,734 10,575 3,159
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Source: SBP
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