Reforms must continue: SBP: GDP growth recorded at 3.6pc
By Mohiuddin Aazim
KARACHI, Oct 28: The State Bank warns that the improvement in external account may tapper off in future — and if it happens it may have significant negative repercussions. These may include re-emergence of expectations of rupee devaluation and a jump in interest rates.
In its annual report for fiscal year 2001-02, released here on Monday, the State Bank says Pakistan must continue implementing the IMF/World Bank-backed reforms to improve upon the 3.6 per cent growth in GDP achieved in 2001-02.
“With prospects of a broad economic recovery looking bright, it becomes even more important that the FY 02 improvements in the macroeconomic fundamentals not be frittered away,” says the report.
“The key policy challenge for the government in FY 03 is to stay the course by remaining fully committed to implementing the ongoing reform process — irrespective of gains such as the higher availability of external assistance and debt re-profiling etc.
“In particular it is important to note the possibility (however modest) that the external account improvements could tapper off in future; if this development emerges it could have significant negative repercussions, not least the re-emergence of devaluation expectations and a jump in domestic interest rates.”
The report says these concerns are particularly coloured by the realization that “domestic policy only set the enabling environment that allowed the economy to take better advantage of the positive exogenous shocks.”
The report underlines the fact that “the catalyst (and at least in part continuing driver) for the rise in transfer payments into Pakistan was the policies of other countries, especially the international crackdown on informal flows that drove up remittances.”
Home remittances that are the second largest source of foreign exchange earning after exports shot up to nearly $2.4 billion in fiscal year July/June 2001/02, up from a little more than $1 billion a year ago.
The SBP report says that the concern about the external account improvement tapering off has led it to opt for a “gradual adjustment of its monetary and exchange rate policies despite a substantial improvement in the current account.”
The report adds: “An abrupt shift in the exchange rate is not to be desired in any case as an inadequate adjustment period for exporters could lead to the loss of hard-to-recapture export markets and a consequent fall in economic activity and higher unemployment.” That is why, says the report, the SBP is likely to continue with the policy of gradual adjustment in the exchange rates.
The report says the outlook for inflation does not show any sign of concern. In fiscal 2001/02 consumer inflation stood at 3.5 per cent, down from 4.4 per cent a year ago.
About revenues it says that the government should see higher net tax receipts due to the self-assessment scheme, lower tax refunds, absence of further cut in maximum customs duty rate and a return to normal imports in fiscal 2002/03.
The report notes: “The positive developments in the country’s economy do not appear to be fully reflected in Pakistan’s current sovereign rating, possibly due to the impact of political uncertainties.”
“The continuation of current economic policies as promised by the President would thus be expected to result in an upward re-rating, attracting greater investments,” says the report.
“In short, if the global economy does not see a major dip, Pakistan appears well placed to meet its economic targets in FY 03. In fact the FY 02 developments provide a rare opportunity for Pakistan to accelerate the improvement in the country’s economic fundamentals.”
PER CAPITA INCOME: The report says that per capita income in FY 02 inched up to Rs26,413 from Rs24,198 in FY 02 as the economy grew by 3.6 per cent.
GDP GROWTH: The 3.6 per cent growth in GDP (gross domestic product) in FY 02 was slightly lower than the target of 4 per cent — and driven mainly by a higher growth in the services sector. The services sector grew by 5.1 per cent against the target of 4.4 per cent. On the other hand, large-scale manufacturing sector grew by only 4 per cent against the target of 6.5 per cent.
The growth in agriculture sector was also lower than the target — 1.4 per cent against 2 per cent. Within the agriculture sector, major crops showed a negative growth of 0.5 per cent in FY 02. In FY 01, the growth of major crops was minus 0.2 per cent.
The report attributes the poor performance of the agriculture sector to “a third successive year of water shortage” that took its toll on major crops. The manufacturing sector as a whole recorded 4.4 per cent growth in FY 02 lower than the target of 5 per cent. Though this performance was considerably weaker than the 7.6 per cent growth achieved by the manufacturing sector in FY 01, “it must be remembered that the economic environment was shrouded in uncertainties through much of FY 02, first due to the conflict in Afghanistan and then due to border tensions with India.”
The report says: “The increased access to key Western markets and a substantial decline in interest rates” catalyzed the textile sector recovery in the second half of FY 02 thus enabling the service sector to grow by 5.1 per cent.
But “while the growth rate recorded some improvement in FY 02 the quality of growth remained lacklustre and shallow as the spread and spillovers to the rest of the economy remained highly limited.”
SAVINGS AND INVESTMENT: The report says that provisional estimates for FY 02 suggest that the pace of investment has not picked up and the declining trend witnessed over the last decade persists. “This is reflected in the 5.9 per cent decline in (nominal) gross fixed investment in FY 02 against an increase of 7.9 per cent last year.”
As a ratio to GNP (gross national product) it declined to 12.2 per cent from 14.5 per cent last year. But though the overall investment fell short of the target “the growth in foreign direct investment is encouraging — it increased to US$ 484.7 million compared to US$322.4 million in FY 01.”
National savings grew only by 1.01 per cent in FY 02, down from 15.70 per cent in FY 01. Within national savings, the growth of public savings declined to 47 per cent in FY 02 from 316 per cent in FY 01. And private savings that had recorded a growth of 10.31 per cent in FY 01 showed a negative growth of 2.09 per cent in FY 02.
FISCAL POLICY: In FY 02, overall budget deficit swelled to 6.6 per cent of GDP, sharply up from the budgetary target of 4.9 per cent. The report says this was largely driven by increased defence spending (Rs17.4 billion) and three one-off expenditures — a grant to CBR to clear accumulated income tax refunds (Rs22 billion); a substantial investment in KESC to prepare it for privatization (Rs30 billion) and a settlement of Wapda arrears (Rs5 billion).
The report says though total revenue rose from Rs546 billion in FY 01 to Rs630 billion in FY 02 on the back of a large rise in non-tax revenue (up from Rs102 billion to Rs153.7 billion) the overall tax collections were well below the FY 02 target. The target was set at Rs658 billion for total revenue — Rs528 billion for tax revenue and Rs130 billion for non-tax revenue.
