SBP report - the fine print

At the outset a limitation of liability clause: the comments, data and extracts are from the State Bank of Pakistan's (SBP) publication, Annual Report, The State of Pakistan's Economy (the Report). While in certain instances, comments and phrases may have been modified, however by and large, the essence of what the SBP wanted to bring across has been retained; and some of it is scary even for us laymen.
The Report's executive summary begins with GDP growth and while every attempt is made here and there to sound positive and optimistic, the professional commentary on facts, the fine print if you may, gives the plot away. Since GDP, and now perhaps debt, are already everybody's favourite topics today and extensively discussed at every forum nowadays, notwithstanding that almost everyone does not even understand the term GDP, let's defer debate on these economic indicators for ensuing weeks and today focus on the fine print; except as a trailer, some of the facts on GDP and debt, as published in the Report are an eye opener. So what do I mean by the fine print? Well, the stuff below which generally tends to get ignored in such reports.
SBP believes that the underserved sectors like SMEs and agriculture may help in boosting exports but notes that in spite of it promoting and providing incentives to commercial banks, the share of SMEs in private sector credit has fallen to 5.9% during FY2017 compared with 15% in FY08. There is a definite need to review the incentives that the State designs to direct investments, since most of these schemes, including tax holidays, seem to by and large fail, if not miserably; perhaps a more direct public sector support to critical sectors is the need of the hour. I for one tend to agree that the SME, currently stuck in the informal sector, is where Pakistan's potential for future economic growth lies, and procrastinating might have irreversible adverse impacts, especially emanating from competition from cheaper Chinese products, that now enjoy multiple tax exemptions.
The central bank categorically points out that what is left after provincial shares from tax collection under the 7th NFC award is not sufficient to meet debt servicing and defence needs of the nation; this perhaps in the nearest SBP will come to admitting that the nation is stuck in the debt trap or suggesting that the NFC needs to be revisited in favour of the Federation. In an earlier article a while ago, similar to what SBP is directly saying, I had observed that net federal revenue receipts were insufficient in 2017 to meet even 30% of the defence expenditure, after debt servicing; note what SBP is indirectly saying is that all other expenditure, current as well as debt, is being met from further borrowings, in one form or the other! Elsewhere in the executive summary of the report, SBP diplomatically mentions that if the Government had not sold Pakistan Security Printing Corporation and two LNG power plants, and increased mark up recovery from lending to State Enterprises, things would have been worse; minus the "one-off" revenue items, non-tax revenues were significantly lower compared to last year!
"As a result, the tax-to-GDP ratio declined to 12.5% (FY17) after rising consistently to 12.6% by FY16 from the low of 9.3% in FY10.", from the Report.
As regards inflation, the Report observes that increase in inflation was fairly broad-based with an increase in prices of 147 item of above 5% with decline in prices in only 68 items. Apparently, a stable exchange rate, which cost the SBP US$ 2 billion of its liquid foreign exchange reserves, and a decline in energy prices helped contain inflation; except that international oil prices decreased, which in itself is interesting!
"However, a 19.1 percent growth in imports (fob) excluding machinery indicates that a significant contribution to overall growth in imports is coming from oil and consumer goods (including food)", from the Report. Link this comment with SBP being less than enthusiastic about share of consumption in Pakistan's GDP having increased from an already whooping 90% to 94% in FY17, and you understand why SBP believes that the situation is less than encouraging when looked from the context of maintaining external sector stability. "Less than encouraging" is always an interesting choice of words. Nonetheless, SBP is building a case for, and implicitly suggesting, strong austerity measures.
Notwithstanding that all of the above need serious policy interventions, the biggest wake up call for the ruling elite, of all provinces, should be that SBP is extremely worried about water sustainability in Pakistan. Beyond water stress, the report points out that quality of water deteriorated due to increasing pollution and contamination. "The water stress is a serious challenge for food security and sustained long term economic growth of the country... Addressing these concerns would require a national policy on water with a broader consensus among all the provinces and the federal government", from the Report. Apparently, the SBP wants the Government to build more Dams!
Going forward, SBP is sceptical about the government meeting its laid down fiscal deficit target of 4.1% for FY18, especially due to increase in provincial spending due to election years; no surprise there, money is needed to win elections! The governments and SBP's ability to maintain weak domestic oil prices and a stable exchange rate are deemed critical to curtail inflation to 5.5%. SBP projects that the current account deficit in FY18 will remain around FY17 level which obviously is not good news, and while maintaining that a lot depends on addressing emerging challenges, provides no hints on what to do!
Once again I reiterate, all of the above is not my analysis, I am just reading the SBP Report; more on it next week!
(The writer is a chartered accountant based in Islamabad. Email: [email protected])