The State Bank has maintained its tradition to give a generally balanced view of the economy. In its annual report for FY16 released on 17th November, SBP has highlighted both the gains and challenges to the economy along with prospects for 2016-17. According to the report, Pakistan's economy maintained its momentum towards a higher growth trajectory in FY16 due to enabling policy environment, higher infrastructure spending, low interest rates, rise in domestic demand, better energy supplies and improvement in the security situation. Current account deficit, though larger than last year's, was comfortably financed by financial inflows, leading to accumulation of foreign exchange reserves to an all-time high level. FY16 also witnessed the successful conclusion of the IMF programme, helping the country secure financing from other sources as well. A stable exchange rate and a significant decline in oil prices pushed CPI inflation down to only 2.9 percent during FY16. Recognising the scope for pro-growth policies, SBP slashed the policy rate to 5.75 percent and lending rates of commercial banks followed suit to raise the private sector borrowings from the commercial banks. Fiscal consolidation also remained on track and budget deficit was reduced further to 4.6 percent of GDP from 5.3 percent a year earlier.

While enumerating these gains, SBP has also pointed out certain challenges that deserve undivided attention of all the stakeholders. Firstly, Pakistan needs to increase its savings and investment levels. Secondly, exports continue to pose a major challenge for a sustainable external account. Thirdly, while ongoing fiscal consolidation measures were welcome, reliance of the tax structure on stopgap measures was creating distortions in the economy. Sectors like telecommunication and energy yield hefty revenues, others, like agriculture, are hardly contributing to revenue growth. And finally, the country was unable to spend nearly as much on social sector development as it needs to. Be it health or education, Pakistan spends much less as percentage of GDP than many developing countries. While reform process was essential in the public sector, private sector participation was also necessary to achieve a high and sustainable growth that is built on the pillars of entrepreneurship, innovation and competitiveness.

As for the outlook for FY17, business sentiments were upbeat due to an improved macroeconomic environment, better energy supplies and subsiding security concerns. Government envisages a growth rate of 5.7 percent for 2016-17 - a sizable 100 basis point (bps) rise from the 4.7 percent growth realised in FY16. "In line with soft commodity prices in the international market, inflation outlook for Pakistan remains subdued." The risk to this benign outlook could be a surge in oil prices due to some supply shock and sudden rise in the prices of perishable items due to supply disruptions. On the fiscal side, budget deficit targeted at 3.8 percent of GDP for FY17 was 80 bps lower than the actual deficit of 4.6 percent in the outgoing year. However, this would require a strong fiscal discipline and concerted efforts to enhance revenues. "The continuation of taxation reforms for widening the tax base and bringing more people in the tax net would be the key to achieving the target." Exports were expected to post a marginal recovery in FY17 due to improvement in energy supplies, some pick-up in global commodity prices and recovery in global demand (particularly in the Euro area). SBP expects remittance growth to remain tepid and C/A deficit to stay in the range of 0.5-1.5 percent of GDP. IMF programme had been a key element of balance of payment comfort for the last three years. There is a need to expedite the reform process; especially the resolution of issues that are related to energy sector and other loss-making PSEs.

To say that assessment of the economy in the SBP's annual report is quite fair and objective would, in our view, be stating the obvious. Unlike the government, the State Bank this time, instead of giving an exaggerated view of the economy, has opted to be quite objective in its analysis. This will restore faith in the credibility of the SBP and improve its image within the ordinary people and educated circles. Coming back to the report, positive developments in the economy during FY16 have been highlighted umpteen times and have become common knowledge by now. It is good to see that GDP growth rate was higher than last year's, exchange rate continued to be stable, foreign exchange reserves reached an all-time high during the year, CPI inflation was down to a low level and budget deficit was reduced but the real contribution of the report was in highlighting the challenges to the economy and requesting for undivided attention of all the stakeholders to resolve the endemic issues. The report is on the spot when it says that savings and investments need to be increased, a continuous decline in exports is a major threat, the reliance of the tax structure on stopgap arrangements should be reduced and social sector development has not been accorded the needed priority. However, proposed measures in these areas fall short of expectations and do not cover the entire spectrum of issues. For instance, the report says that savings cannot be increased unless the private sector comes up with attractive saving schemes in the areas of pensions, provident fund, gratuity and old age benefit schemes. No mention, however, has been made of the major factors such as the power to save and the will to save which could be influenced by giving a positive real rate of return to savers, improving security situation and investment climate in the country and reducing population growth rate. Commenting on a consistent decline in exports, SBP has largely avoided laying emphasis on ensuring competitiveness of Pakistani exports by devaluing the rupee. Such a thinking may be in line with the stance of the Finance Minister but is highly damaging for exports. However, SBP is right in emphasising the fact that all the sectors are not contributing their worth in total taxes. Clearly, the efforts on this front have always been bogged down by entrenched lobbies and vested interests against whom the government always becomes fickle. The recent revision in the valuation of property for tax purposes is the latest case in point. The SBP has also rightly emphasised on social sector development this time. The government should deal seriously with the social sector issues failing which the writing is on the wall and the country could descend into a chaotic situation. Besides, entrepreneurship, innovation and competitiveness are undoubtedly the pillars of a sustainable growth but the SBP must be aware that these pillars cannot be built if the highly educated people and top professionals of the country are not prepared to work in the country due to a variety of reasons and even local investors have been found to be always looking for greener pastures abroad.

As for the likely developments during FY17 are concerned, the SBP seems to have an optimistic view of the economy. For instance, the State Bank does not disagree with the budget deficit target of 3.8 percent during the year but says that this will be contingent on strong fiscal discipline and continued reforms on widening the tax base and broadening the tax net. This is probably another way of saying that this lower target is not possible to achieve. Similarly, the SBP has estimated that exports would post a marginal recovery and growth in home remittances would be tepid in FY16 when all the indications point to the contrary. Even the latest data during the current year do not support such a contention. However, the most worrying aspect of the economy is the fast accumulation of debt burden. During FY16, public debt which essentially represents accumulated budget deficits, has shot up by Rs 2.3 trillion to stand at Rs 19.7 trillion or 66.5 percent of GDP by end June, 2016. With the notable increase of dollar 6.8 billion during the year, stock of external public debt has also gone up to dollar 57.8 billion. However, the SBP was quick to say that "the need for quick recovery in Pakistan's export earnings can hardly be overemphasised for sustaining the prevailing comfort on debt servicing." In our view, it would have also been better for the State Bank to add that the condition for sustaining comfort, ie, export expansion was not an easy proposition in the given environment and the consequences for failing this condition will be dire for the economy. Overall, however, we feel that though the tone of the SBP in the report is relatively soft yet it has tried to convey the right message to Islamabad not to regale in its achievements but also look at the long list of weaknesses which have yet to be attended to. Business Recorder would like to state: a) Country has been faced with the same set of problems since 1988, b) what has changed? The answer is: nothing. We continue to tax on basis of ease of collection rather than taxing where the black economy thrives. Instead, we need to be bold and decisive and stop living in a make-believe world.