November 4, 2002	Monday	Sha’aban 28,1423

The State Bank of Pakistan’s Annual Report for the FY 2001-02 provides an opportunity for all the stakeholders to have a consolidated and reliable picture of the immediate past of the economy and a vision for the future; present being of no consequence. The report, therefore, serves an important function.

Before we look into the future of the economy, with the SBP’s insight available, it would be interesting to summarize the central bank’s assessment of the economy over the last financial year, as future performance of the economy is entrenched in our immediate past.

According to the bank, ‘Pakistan’s economy performed reasonably well in FY 02 with tremendous improvement in external sector. Post-9/11 contributed to positive developments for many macro-economic indicators. The trade deficit turned out to be much lower; exports recovered in the second half to reach preceding year’s level and imports dropped.

The current account was in surplus and underpinned the unprecedented 6.7 per cent appreciation of the rupee.

An upsurge in worker’s remittances, increased official transfers and savings in interest payments allowed the FE reserves to reach an all time high. Inflation was down to 3.5 per cent.

The real GDP grew by a reasonable 3.6 per cent but the increase was concentrated in fewer subsectors. (Agriculture 1.4 per cent, LSM 4.4 per cent and Services 5.1 per cent). Pakistan’s debt profile also improved as both its external and internal loans indicated reduction in size. The total debt improved to 102 per cent of the GDP by the end of the financial year.

The bank, however, expressed concerns about a number of areas in which the economic performance was not satisfactory during the year.

These areas can be divided into two broad categories; one where unsatisfactory performance was attributed to the external compulsions arising from post-9/11 scenario and the IMF conditionalities and the other that relate to internal policy initiatives where government could play an important role. The areas falling in the first category can be identified as under:

(a) tax revenue collections remained below the projected levels;

(b) the export targets were not achieved;

(c) foreign investors remained hesitant to invest in the country;

(d) development spending remained low and (e) budget deficit increased to 6.6 per cent of the GDP.

Discussing these areas, at this stage, is not worth while as there was hardly anything that the economic managers could do to change or modify these areas, within the short period available to them.

We should therefore look into the areas of concern identified by the bank, where a different policy-mix could be more effective. These areas were:

(a) skewness of the growth;

(b) ineffective private sector demand for credit utilization, and

(c) timid credit policy of commercial banks.

The State Bank accepts 3.6 per cent GDP growth rate for the year as reasonable. It, however, shows its concern on the structure of the growth, which, according to the bank was highly skewed, with a single component, public administration and defence, accounting for a major portion of the total increase in sectoral value added during the year. The bank is thus implying that the growth rate was not much higher than the previous year, because the domestic production of goods and services has increased in that proportion. It was only because of the higher government spending at 6.6 per cent of the GDP which made the growth rate jump to the above level.

There was thus not only an imbalance in between the production factors but also an element of artificiality in the computation of the growth rate. With the above concern raised by the bank, the reliability of the growth rate becomes questionable. This is further substantiated by the fact that while the agricultural sector growth improved to 1.4 per cent of the GDP compared to minus 2.6 per cent last year and that too because of improved livestock production and growth rate of large scale manufacturing declined to 4.4 per cent of GDP from 7.6 per cent last year. Even this growth was limited to electronic goods and car production, which had little dispersal effects on the economy.

The other two concerns raised by the bank relate to the consequences of 14.8 per cent growth in M2 as a result of purchase of US dollars from the local market. According to the bank, the purchase of US dollars by the bank increased the rupee liquidity that allowed a substantial expansion of banks deposit base, but net private sector credit demand did not grow correspondingly. The bank has also observed that banks demonstrated an apparent preference for less risky assets.

The central bank has not discussed the two questions that it has raised. There may be many cogent reasons for this discretion, but an important reasons could be that the role of private domestic investment in the growth of an economy is not a priority component of IMF prescription.

The question is why private sector credit demand was shy during the year, especially when credit was available at cheaper rates (compared to the previous years). There could only be two possible explanations. Firstly that the business community had no opportunity to invest and if the above assumption was not wholly correct, then there was something basically wrong with the banking industry. The availability of credit in such a case was only a facade.

There is no doubt that demand for credit in the private sector has been on a decline in last few years for a number of reasons, two of these being: decreasing public investment in the infrastructure and restructuring of banking sector with emphasis on recovery/ re-adjustment of non-performing loans. The domestic business in the country has, however, survived the two bottlenecks. The new element that has, perhaps, made a difference is the prudent regulations issued by the SBP. With prudent regulations, institutional lending has become a domain of the auditors. The banks are, therefore, not interested in providing the money to the investors, as lending is a high risk business. They prefer to play safe. It is therefore time to review whether the central bank is not over-regulating the banking industry.

Sustained growth depends on investment. Regulating investment is therefore desirable but over-regulation may kill the hen that lays the golden eggs. It is a good sign that the State Bank is aware of the problem, even if it has not yet analyzed it and determined the causes for low investment.