Though the second quarterly report is late and the tone is somewhat subdued yet the message from the State Bank is very clear. According to its assessment in the second quarterly report for FY12 released on 20th March, risks to macroeconomic stability had increased during the year, despite some signs of modest improvement in the economy. These risks were stemming primarily from the external sector and continued infirmity on the fiscal side. The position of the external sector weakened at a rate faster than expected and the fall in financial and capital inflows exerted pressure both on foreign exchange reserves and the Pak rupee. Excluding remittances, all other components of the current account balance had deteriorated. The import bill increased on account of higher international oil prices and the import of fertilisers while export growth slowed down to only 3.9 percent during the first half of 2011-12 as compared to 18.9 percent in the corresponding period last year. Overall, the current account deficit is expected to be in the range of 1.5 percent to 2.5 percent of GDP during FY12 as against a small surplus in the previous year. The real challenge, however, is financing the current account deficit as both debt and non-debt inflows have declined. This together with the scheduled repayment of IMF loan (dollar 1.1 billion) during H2-FY12 may result in drawing down foreign exchange reserves further. Containing the fiscal deficit to its revised target of 4.7 percent of GDP is highly unlikely and depends largely on the realisation of envisaged surpluses from provincial governments (which at present are a black hole), non-tax revenues like inflows from CSF, auction for 3G licenses and strict control on expenditures. More worrying is the likelihood that the burden of financing this deficit is likely to fall on banking system, specifically on commercial banks. "Other than growing concerns about meeting the borrowing needs of the private sector, renewed government borrowings from SBP entails rising inflationary expectations in the economy." According to the quarterly report, government borrowings for budgetary support had more than doubled, compared to the same period of last year and the government was unable to meet its self-imposed quarterly limit of zero net budgetary borrowings from the SBP. Inflationary outlook had improved slightly on account of supply side factors but CPI was still expected to increase within the range of 11.0 to 12.0 percent. Growth prospects of the economy had improved somewhat since the publication of SBP's Annual Report in December, 2011 but the rate of growth was estimated to be only in the range of 3 to 4 percent or lower than the target of 4.2 percent. In our view, there can hardly be any disagreement with SBP's assessment of the economy though in certain areas, it seems to have ignored some latest negative developments to give a slightly positive angle to the unfolding situation. Whether this was deliberate or unintentional is difficult to say but such an approach does not make much difference to the underlying theme of the quarterly report that risks to macro-economic stability have increased. The State Bank's projection of a growth rate in the range of 3 to 4 percent, though slightly better than expected earlier, is not going to improve employment generation; it would definitely push a sizable section of population further under the poverty line. It is surprising that the government has not met any kind of success to overcome negative factors like acute energy shortages, poor law and order situation and increasing militancy in the country, which are the main impediments to investment and growth. The fiscal position seems to be getting worse with the passage of time with no meaningful effort in sight to stop the rot. It appears that the government is hoping against hope that non-tax revenues like inflows from the CSF would materialise but the futility of such expectations is obvious unless the US changes its present posture towards Pakistan. In addition, provinces are not generating the expected surpluses and losses of PSEs, payment on account of subsidies and regular provisions for circular debt have become a monumental burden on the budget. On the revenue side, there is no political breakthrough to raise additional resources from the under-taxed as well as exempted sources to finance the widening fiscal deficit. An unfortunate aspect is that such a task could turn into a highly unpopular move for an incumbent government in an election year. The government will, therefore, not like to take on the retail and agri-sectors to hurt its electoral prospects. After all, Pakistan is not the US where the Republicans, in a risky election-year move, continue to offer proposals to cut future Medicare outlays. We fear that the PPP-led coalition government will be satisfying increasing expenditure demands with a view to winning votes. In short, there is every indication that the fiscal deficit is going to be as high as seven percent during FY12 and FY13 and most of it is likely to be financed by bank borrowings which would worsen price pressures in economy and further compound the miseries of ordinary people of the country. Though the State Bank has identified growing current account deficit as a potent risk to economy, yet the size of the deficit seems to have been underestimated. The projection for current account deficit in the range of 1.5 percent to 2.5 percent of GDP during FY12 seems to have been based on the data available up to December, 2011 but developments during January and February 2012 point towards a more serious situation. Based on the trend during the first eight months, C/A deficit may well be dollar 5 billion or more than SBP estimates during the current fiscal year. Oil was priced at $108 per barrel in the budget. A consistent increase in the international prices of oil due to US-Iran stand-off and regular hefty payments to the IMF from now onwards would increase the vulnerability of the country with disastrous consequences in the short to medium term. The State Bank has very clearly identified growing risks to economy after analysing the situation in an objective manner. These risks owe their origins mainly to the areas pertaining to the government and, therefore, could only be overcome by the efforts and determination of the government to improve the situation. It has failed to persuade the fiscal authorities to work out a contingency plan in case CSF payments are delayed or 3G auction does not materialise by end June, 2012. The SBP can help the government create conducive conditions for increasing investment and growth and consequently enhance the potential for exportable surplus in order to reduce the current account deficit. Pushing bank credit through fiscal incentives towards desirable sectors for investment, such as construction, agriculture and SME sectors needs to be considered. Similarly, the budget deficit could be reduced to a sustainable level if the provincial and federal revenue officials work in tandem for the greater good of country's economy. Why is there so much bickering between SRB and FBR? Stop it, please. This could help in reducing the fiscal deficit and as a consequence of it double-digit inflation. This would be a great relief for ordinary people of the country. The State Bank could also contribute to the overall effort of reducing risks to economy by ensuring flexibility in the rupee exchange rate according to market conditions and forcing the government to remain committed to the quarterly limit of zero net budgetary borrowing from the SBP as provided in the latest amendment to the SBP Act. We feel that the State Bank has done its job through proper prognosis of economy in its latest quarterly report. That the central bank has failed to persuade the government to act diligently and resolutely to remove the lengthening shadows appearing fast on the economic horizon is a fact that sadly reflects badly on the PPP-led coalition set-up as a manager and it reflects badly on the captain - the prime minister. Copyright Business Recorder, 2012
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