Going through the second quarterly report for the year 2003-04 released by the State Bank on 30th March, one is impressed with its objectivity and clear-headed approach to important issues.
As expected, the news on the performance of the economy from the State Bank is quite encouraging.
Mainly because of strong acceleration in industrial activities, the real GDP growth during 2003-04 will be comfortably above the 5.3 percent target for the year, "with a concurrent improvement in many macro-economic indicators." As the quarterly report elaborated, "The improvement in the country's economic environment is emphatically punctuated by indicators such as the record high exports, the sharp rise in imports of machinery and inputs, the continuing surge in capacity utilisation, the strong growth in taxes (despite the absence of a major expansion in the tax net) and, above all, the record growth in net private sector credit."
The growth in the domestic sector during the first half of the current year was matched by encouraging outcomes in the external sector account. Both exports and imports registered strong above target growth.
However, the import growth, driven by machinery and raw material, should not be a source of concern, being a precursor to productive economic activity.
The current account surplus at $1.8 billion was significantly positive and, more importantly, persisted even after adjusting for potentially non-repeating flows such as the receipts for logistics support, etc. Growth in tax revenues was robust.
This coupled with expenditure discipline ensured that the budgetary deficit during July-December, 2003 was a stunning Rs 32.0 billion lower than in the corresponding period last year.
However, some evident weaknesses, according to the State Bank, clouded the signal improvements in most areas of the macro-economy.
Unemployment, though falling gradually, remains significant and "with the economy still performing below the 6 percent long-term growth trajectory, the likelihood of immediate relief is low". Another concern is the spectre of rising inflation.
Unfortunately, the incidence of inflation has fallen disproportionately on the most vulnerable income groups due to upsurge in food prices driven by supply shocks as well as less than adroit management of the supply chain.
The food price dominated profile of inflation and the potential negative consequence of a premature hike in interest rates on growth prospects led the SBP to keep its monetary posture unchanged.
However, the report promises that State Bank "stands ready to respond aggressively to contain the surge in inflation beyond tolerable limits."
The report has been made more meaningful and in a way thought provoking by the addition of a section on "looking forward".
The economic growth momentum, according to the State Bank, is still gathering pace. As regards the low cost of credit, it has not been without a price because the resulting fall in carrying costs has weakened reduced an important constraint on speculative activities.
The recent wheat shortage, in the absence of the discipline of a competitive market or government regulation, illustrates the point. Illegal and immoral speculative activities need to be reined in, otherwise such activities could undermine public support for market liberalisation.
According to the report, it may also be desirable for the SBP to gradually scale down its forex market intervention.
Given that external surplus is likely to decline due to rising imports and the end of Saudi Oil Facility, such a policy would permit the rupee-dollar rate to remain relatively stable, while simultaneously containing the growth in monetary aggregates.
The State Bank is optimistic about the emerging fiscal space and has urged the government to focus on redressing the social sector shortfalls expeditiously. In this context, the report has come up with a novel idea to cope with the constraint of lack of implementation capacity by advising the government to take advantage of the managerial capacity available with reputable established private sector social service providers.
The State Bank has also forewarned the authorities that continued progress of the country on a stable and sustainable high growth trajectory would depend on sound policies.
Such a caution was necessary because of graduation from an IMF programme which may be taken to imply a relaxation of macro-economic discipline.
The State Bank, in our view, has highlighted macro-economic developments during the review period quite faithfully, identified some of the relevant issues and offered advice wherever appropriate.
It is, of course, very reassuring that economy of Pakistan is moving towards a long-term growth trajectory of 6 percent or above and has more or less overcome the endemic problems of high budget deficits and widening gap in the external sector.
This has allowed the authorities to contain price pressures, reduce outstanding external debt, accumulate foreign exchange reserves and placed the country in a position where it would no longer require IMF assistance to remain solvent.
The advice by the State Bank that sound policies would still be needed after graduating successfully from an IMF programme, is timely because of the likely pressure to avoid further reforms and provide relief after the completion of the ongoing PRGF programme.
Some of the other concerns expressed by the State Bank are also very valid. It is worried about large-scale unemployment in the country and is quite apprehensive about the spectre of rising inflation which affects the poor people disproportionately. It is also good to see that State Bank is aware of the adverse effects of low cost of credit which could encourage speculative activities.
The statement that the central bank stands ready to respond aggressively to contain surge in inflation is highly positive. It shows the resolve of the monetary authorities to do whatever is possible to ensure stability in prices which is the most fundamental duty of a central bank.
Most of the other observations in the report are also well considered and worth noting.
However, it needs to be pointed out that State Bank's job as an autonomous institution is to provide an objective assessment of the economy in its reports. Whether the National Assembly and the Senate to which these reports are addressed, would find time to think seriously about the issues and implement appropriate policies is hard to say.
There is no denying the fact, though, that State Bank's views are generally listened carefully and treated with respect by all and sundry.
Although the State Bank has done its job, a lot of people would find it hard to understand the missing link between substantial improvement in all the macro-economic indicators and their transmission at micro level where the situation is bleak.
Rising poverty, large-scale unemployment, inequitable distribution of wealth, collapsing system for the delivery of public goods and general public discontentment are all manifestations of the state's inability to distribute the dividends of macro-economic stability among the people.
The fact that the harvest of development is not percolating to the deprived sections of society is a cause of worry and needs to be looked into.
The State Bank has suggested that the government take advantage of the managerial capacity of private sector social service providers as capacity constraints cannot be a lasting excuse for not allocating higher funding for social sectors.
The idea of inflation beyond tolerable limits which would push the State Bank to respond aggressively is rather sketchy.
Its vagueness could lead to different interpretations, tempting some of the analysts to cast doubts on the sincerity of the State Bank in controlling inflation.
At present, depositors are getting a negative rate of return on their savings. The real beneficiary are the borrowers who include both the private sector and the government. It needs to be explained that raising rates artificially by the SBP is not the answer.
Lending rates would rise if both the public and private sector enhance their industrial investment activity.
This is only possible if the enabling environment is improved and corporate profitability is not frowned upon.