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KARACHI, Dec 7: The State Bank of Pakistan says doubts will linger on about Pakistan’s economic prospects — and about the speed with which things will return to normal — until “there is a credible solution to the Afghan situation.”
Meanwhile, the country “should shore up confidence by taking difficult steps in terms of fiscal reforms,” says SBP’s first quarterly report released here on Friday.
The report says Pakistan should also go for merging the inter- bank and open foreign exchange markets, dismantling subsidies and improving the financial viability of state-owned enterprises. It says if proper steps are taken to help the agriculture sector and weather conditions remain favourable a certain level of the economic growth could be assured. Earlier, the SBP had said in its annual report for the outgoing fiscal year, that Pakistan’s economy could grow by 2.5-3.75 per cent in the current fiscal year.
The quarterly report that covers the events of July-September 2001 says although uncertainty still remains following September 11, the reforms implemented during the past year have improved Pakistan’s macroeconomic fundamentals. That, in turn, has made the economy more resilient to such shocks.
The report says though the war in Afghanistan has entered a new phase with the strategic retreat of Taliban forces...the implications for Pakistan are still unclear. But it points out that the war-risk premium has been taking a toll on both importers and exporters.
The report says the actual implications of the Afghan war will only be realized in the second quarter of this fiscal year — between October-December 2001.
“In the post-war uncertainty, the exporters suffered not just in terms of the war premium and higher transportation costs, but also due to the appreciating rupee and reduced orders from the US and EU.
“There is also a real fear that even if conditions return to normal, Pakistani exporters may not be able to recapture lost market outlets in the West,” the report warned. It says though efforts are under way to secure special access to Western markets, the degree of market access that Pakistani exporters are expecting may not materialize. The reason is the global recession is making G-7 countries more introverted in their short-term trade outlook.
The report further says though certain promises by the US and EU for special assistance to Pakistan have been made (and some formalized) it will take time before this funding is actually realized.
The report clarifies that contrary to popular belief, the debt rescheduling agreements that have been signed since September 11 are unrelated to Pakistan’s enhanced stature in the global order.
“These agreements are mere formalities following certain decisions taken in the rescheduling talks that took place in January 2001 as part of the IMF stabilization programme,” the report said.
“The approach developed by the government for discussion on Pakistan’s external debt is a significant departure from the conventional rescheduling and entails debt re-profiling,” said the report. “This will provide Pakistan an opportunity to tailor (on a permanent basis) its debt servicing payment in accordance with its capacity to pay.”
MOST CRITICAL DEVELOPMENT: The report says global awareness of the Hundi system and certain steps taken in the UAE have changed the behaviour of money changers. It says that in October 2001 the average kerb premium was just 0.7 per cent compared to 4.1 per cent in September.
“Although this trend may seem temporary in nature, the threat of international scrutiny is almost equivalent to a structural change in the kerb market,” says the report. “If international pressure remains, it is unlikely that the kerb premium will return to pre-October levels.”
The report says that the SBP has been purchasing hard currency from both the inter-bank and kerb markets to ensure that the rupee does not appreciate too much. “During the month of October alone, net purchases from the inter-bank market were $317 million, while kerb purchases were only $79 million.” The report says the purchases from both markets are continuing.
FIRST QUARTER OVERVIEW:
1. AGRICULTURE: The SBP report says agriculture sector has shown signs of improvement in the first quarter of this fiscal year. It says initial estimates point towards higher than targetted production of sugar cane, cotton and improved varieties of rice. The report says the cotton crop is expected to be in the range of 10.2-10.5 million (ex-gin) bales against the original target of 8.7 million bales.
“In effect, Pakistan could witness its third bumper cotton crop in three consecutive years.” A table attached with the report shows that sugarcane production could also rise to 46.5 million tons against the original target of 38.1 million tons.
The report link the improvement in the agricultural production to more than expected rainfall. But it makes it clear that in case of rice “the outlook may not be as encouraging since this crop is more dependent on canal water than rainfall.”
LARGE-SCALE MANUFACTURING: The report says that large-scale manufacturing grew by only 5.3 per cent in the first quarter of this fiscal year against 8.1 per cent in a year ago period. It says that all industries, with the exception of metal and engineering, grew in nominal terms. But only few showed improved performance over last year. The report says that in a sharp contrast to last year, textiles slowed down despite depressed lint cotton prices at the start of the cotton season. During the first quarter of this fiscal year, textile sector grew by only 2.2 per cent compared to 5.1 per cent in the corresponding period last year.
“As most manufactured textile items are exported, the impact of global recession on local industry cannot be ignored,” says the report.
“Although, the quantum of textile exports has not declined, the spillover effects of recession are clearly evident from declining prices of textile products in the world market.” So manufacturers curtailed production in the first quarter anticipating further deepening of the recessionary trend.
FISCAL DEVELOPMENTS: Tax collection in the first quarter of this fiscal year showed negative growth compared to a buoyant performance a year-ago. Total tax collection in July-September 2001 stood at Rs77.5 billion down by Rs2.4 billion from Rs79.9 collection realized a year ago.
This was mainly due to (i) a significant decline in dutiable imports, which in turn form the base of custom duties and sales tax on imported goods; and (ii) large payment of refunds/rebates.
The SBP report says Rs21.1 billion were paid in refunds/rebate in July-September 2001 against Rs15.7 billion in July-September 2000.
