Pakistan's economy fared poorly during the last fiscal year as compared to its neighbouring countries in South Asia because of domestic and global factors, however the State Bank of Pakistan, believed the domestic issues are more decisive and chronic.
According to the SBP's annual report: "The State of Pakistan's Economy" despite devastating floods in the early part of the fiscal year, the country's economy managed to grow by 2.4 percent in fiscal year 2010-11 (FY11). However, according to the report the growth is less than other neighbouring countries in South Asia, as the China, India and Sri Lanka, Bangladesh have posted a better real GDP compared with Pakistan during FY11. During last fiscal year, China projected a GDP growth of 9.5 percent, India 7.8 percent, Sri Lanka 7 percent and Bangladesh 6.3 percent.
The report said both domestic and global factors are responsible, but it believed the domestic issues are more decisive and chronic. These include the collapse of fixed investment,. acute energy shortages, urban violence and lawlessness, poor physical infrastructure and institutional fragility. The report also revealed that the issue of fixed investment merits special mention; Pakistan's investment rate was only 13.4 percent in FY11, which is the lowest since FY7.
Since this is a leading indicator for economic growth and employment, the uncertain business climate, high demand for loans and the hesitation of banks to lend are jointly responsible for this state of affairs. The SBP said that policymakers must focus on such basics if Pakistan's economy is to move forward.
According to the report, during the last fiscal year most of economic targets were not achieved and the country missed real GDP growth, fiscal deficit, agricultural growth, Large Scale Manufacturing, services, consumer price index, investment, revenue, current expenditures and development expenditures targets for FY11.
As against target of 4.5 percent, the country witnessed a 2.4 percent real GDP growth in FY11, which is also less than 3.8 percent growth in FY10. The report said one-fifth of the country's agricultural heartland was inundated, which interrupted production processes and disrupted the subsequent supply of both labour and capital. It is estimated that 6.6 million of Pakistan's labour force was out of work for 2 to 3 months, and capital stock worth US $2.6 billion (1.2 percent of GDP) was lost, the report added.
The SBP report said while the international response to the devastation was below expectations, it is commendable that the government was able to address these challenges despite severe fiscal constraints. Furthermore, the inherent resilience of the agri. sector allowed it to post a bumper wheat crop in the Rabi season and sizeable production of minor crops (potato, onion, pulses, etc), which spearheaded the revival, the report said, adding that a spontaneous community effort towards rehabilitation and government support in the form of cash payments to flood victims and providing free seeds and fertilisers, allowed the country to overcome this natural disaster.
According to the report, the manufacturing sector suffered a serious setback. Industrial growth was negative 0.1 percent in FY11, due to flood-driven supply chain interruptions; prolonged power outages; and reduction in gas supplies. Services, on the other hand, supported growth on the back of a rise in government salaries and defence spending. The overall growth in services was 4.1 percent in FY11, which was lower than the target 4.7 percent, but this still accounted for 90 percent of real GDP growth, the report added.
It said Pakistan's fiscal position remained under stress during FY11, with a budget deficit of 6.6 percent of GDP, compared to a target of 4.0 percent. The implementation of the reformed general sales tax; the broadening of the income tax net to include agriculture and services; the phasing out of subsidies in a timely manner; and the restructuring of loss-making public sector enterprises - were either delayed, or not implemented, the report added.
On a positive note, the government was able to contain its spending compared to FY10. Budgetary expenditure in FY11 was 18.9 percent of GDP, against 20.5 percent in the preceding year, the report said. However, Pakistan's external debt remains comfortable, especially within the context of the acute problems facing the Eurozone, the report said and added that during FY11, most of the increase was on account of currency revaluation, as the dollar lost value against other hard currencies. The funding that Pakistan actually received during FY11 was largely utilised for the servicing of external debt, it added.
The report stressed that the financing of the fiscal deficit was, and still remains, challenging. 'With a decline in external funding following the suspension of the IMF Stand-By Arrangement (SBA), the government had little choice but to rely increasingly on domestic sources.
As a result, private sector credit grew only by 4.0 percent in FY11, as compared to an increase of 74.5 percent in government borrowing from commercial banks, it said, adding: "In our view, since commercial banks were lending to the government at attractive rates, this left little incentive to fund private businesses."