The State Bank in its first quarterly report (July-September, 2016) released on 30th December, 2016, has affirmed, in no uncertain terms, that most of the macroeconomic indicators of Pakistan are deteriorating. Contrary to the repeated assertions of the government, it has made no bones about the fact that "the first quarter of FY17 experienced a widening of current account and fiscal deficit - the two key macroeconomic indicators - which suggest that the underlying structural issues are still there." The comfort available to finance a persistently high deficit in the form of inflows under the Coalition Support Fund (CSF) and home remittances was weakening while the fall in exports entered in its 10th straight quarter in Q1-FY17 and FDI inflows were also low. The underlying rigidity in the tax structure was evident from lower than expected tax collections during Q1-FY17. Reflecting these developments, while fiscal deficit of the country soared to 1.3 percent of GDP during July-September, 2016 as compared to 1.1 percent in the corresponding period of last year, country's current account deficit more than doubled to $1.381 billion from $579 million in the same period of 2015-16. The average CPI inflation rose to 3.9 percent YoY in Q1-FY17 against 1.7 percent in the corresponding period of last year. This was the highest first quarter increase since FY12. Nonetheless, the SBP has recognised that while some uptick in inflation was expected as inflation had dipped to ultra-lows last year, "further impetus came from supply-side factors". The debt profile of the country has also worsened. The overall stock of public debt rose by Rs866.1 billion in the first quarter of FY17, with over 85 percent of the incremental debt contributed by government borrowings from domestic sources. External debt of public sector also rose by $1.0 billion to reach $58.8 billion by end-September, 2016. The report is, however, positive about the growth rate prospects. Real economic activities are expected to maintain their momentum. Higher production of cotton, sugarcane and maize as well as better supplies of minor crops signal a recovery in the agriculture sector. Though the performance of LSM has remained subdued so far, it could gain some pace on the back of supporting policies and encouraging outlook for automobiles, sugar, pharmaceuticals and construction-related sectors.
The outlook for FY17 as a whole is also quite grim. The SBP has projected the GDP growth rate within a range of 5-6 percent during 2016-17 as against the target of 5.7 percent during the year. An uptick in inflation is expected. While food inflation may remain in check as the current stocks of wheat and rice are sufficient, "the recent revival of global oil prices after OPEC's agreement on oil supply may lead to higher non-food inflation." The SBP also seems to be quite upset about the fiscal outcome. It says that "given the revenue shortfall during Q1-FY17, achieving the annual fiscal target of 3.8 percent of GDP would be challenging. It will require additional fiscal consolidation efforts on the part of the government." "Challenging", in our view, is a very meaningful word to be marked in our context. Current account deficit was also expected to remain in the range of 1-2 percent of GDP in FY17, which was higher than the earlier forecasts. Remittances from AGCC countries which account for over 60 percent of remittances have declined due to fiscal consolidation measures being taken in the region. Export growth projections have also been revised downwards due to renewed concerns about demand conditions in the advanced economies and a further weakening of export prices of basmati rice.
We feel that assessment of the economy by the SBP in its latest quarterly report is not only fair and comprehensive but rejects the propaganda of the government that the country is well on its way to recovery and sustainable development after successfully implementing stabilisation measures with the International Monetary Fund (IMF) support. In fact, the report is a rude shock to those people who believed in government's assertions that all is well on the economic front and visible prosperity is just around the corner. The State Bank's prognosis does not employ dodgy figures but is based on published data and other recent developments. All the analysts are aware that inflation is up, gaps in both current and fiscal accounts have widened and public debt is increasing at a fast rate. While home remittances are down and exports are declining rapidly, CSF and other bilateral inflows may reduce to a trickle, particularly after Brexit and assumption of office by Donald Trump in the US. It is also worth noting that the recent so-called successful conclusion of the IMF programme has also not done much to remove the structural weaknesses and enhance the resilience of the economy which were its main objectives. The government used the programme to build up its foreign exchange reserves and avoided to do the unpopular work of introducing harsh measures due to political imperatives. In fact, some of the government's policy objectives already seem to have been forgotten. For instance, the government is again borrowing heavily from the SBP to finance its budget deficit, the rise in international oil prices is not being passed on to domestic consumers regularly and the inter bank exchange rate of the rupee seems to be stuck at a certain level despite its rapid depreciation in the open market. While the outlook for FY17 as presented by the SBP would appear to be mostly based on genuine grounds, the projections for C/A deficit appear to be highly underestimated. If the trend as witnessed in the first five months of the current fiscal continues to persist, the C/A deficit of the country could be as high as nearly 3.0 percent of GDP as against the SBP projections of 1-2 percent of GDP. The State Bank needs to focus on the latest available data rather than confine itself to the quarterly data to make annual projections.
While we appreciate the efforts of the SBP to give an impartial version and a fair assessment of the economic events, it could have gone even a step further to tell the government as well as the public that some more measures are needed to be adopted urgently. For instance, the FRDL Act continues to be violated as the government is again resorting to heavy borrowings from the SBP, enough measures have not been taken to mobilise higher level of revenues and PKR continues to be overvalued, undermining the competitiveness of exports and both foreign and local investors continue to avoid the country for investment purposes. All these shortcomings would continue to harm the economy in one way or the other and must be overcome for stability and progress of the economy. It is, however, tragic that the government is not giving enough attention to such shortcomings and policy pitfalls but concentrating all its efforts on CPEC which is exhibited as a panacea for all ills of the economy. The government needs to realise that no country has ever developed by solely relying on foreign funding and without its own domestic efforts. Overall, however, we feel that the present quarterly report is a welcome addition to an objective assessment of the economy and needs to be studied seriously by country's policymakers in particular.
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