November 4, 2003	Tuesday	Ramazan 8, 1424

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KARACHI, Nov 3: The State Bank says Pakistan’s economy grew by 5.1 per cent in fiscal year July/June 2002/03, but it admits that the incidence of poverty has risen from almost 20 per cent to 33 per cent. The central bank, however, makes it a point that this increase in poverty incidence has happened over the last 15 years “and is not a direct result of the policies pursued in the last four years.”

In its annual report for 2003, released here on Monday, the central bank also says that “it will simply be a pipedream to expect an accelerated fall in the incidence of poverty in Pakistan in the short term.” It cites “the carryover of the past legacy, current geopolitical and security situation, non-supportive external economic environment and weak institutional capacity” as reasons for this pessimism.

The State Bank, however, calls upon the government to spend more on human resource development and infrastructure as part of a two-pronged strategy to eradicate poverty.

The report says that “the only blemish in the fiscal 2003 performance is the surprising and unfortunate shortfall in development expenditures despite the available fiscal space. But then it offers an explanation: “Before October 2002 elections the Election Commissioner restricted the spending under development expenditures that probably led to this shortfall.”

The report makes this observation after highlighting key improvements in the economy — low inflation, record exports, lower interest rates, stronger rupee, higher industrial and agricultural growth, substantial increase in tax revenues — and the fall in fiscal deficit to 4.4 per cent of GDP. The report said that fiscal deficit fell below five per cent in FY03 for the first time in over 25 years.

The SBP report says that the biggest challenge facing the economic managers in the short term is to create as many jobs as possible. The policy focus, therefore, should shift to: (i) increased government spending on human resource development and infrastructure and (ii) greater investment by the private sector.

A large population is Pakistan’s biggest economic resource but it will be a source of strength “only if properly developed through extensive investment in education and health,” the report says.

The report says that while recovery in GDP growth rate in FY03 predicts good prospect for poverty reduction, the increased fiscal space due to restructuring of external debt should be utilized for increasing the pro-poor budgetary expenditure to reverse the rising trends in poverty and inequality among the households. “Poverty will not be eradicated unless the root causes of poverty, such as deprivation in human capital, are addressed adequately.”

The central bank, however, believes that it is quite unfair to look only to the government for the investment needs of the country. “Given the substantial improvement in governance, policy stability and correction of macroeconomic imbalances, the continued weak (albeit improving) private investment growth is still a matter of concern,” says the report.

“The most promising sectors for job creation by private sector are construction and housing, small and medium enterprises, and rural development (both in agriculture and non-agriculture activities),” it adds. “Government policies — fiscal and monetary — should remain supportive but institutional capacity and bureaucratic hassles forced on private entrepreneurs should be addressed.”

The State Bank praises increased collection of both tax and non-tax revenues that boosted the total revenue to GDP ratio to 17.7 per cent. But then it warns that “notwithstanding the satisfactory fiscal performance witnessed in FY03 it is important to note that Pakistan still remains heavily burdened by the debt incurred in the past years, and needs to generate sustained primary fiscal surpluses for years to come.”

FINANCIAL YEAR 2003 PERFORMANCE: During FY03 the agriculture sector grew 4.1 per cent compared to only 0.1 per cent decline in FY02, says the report, attributing this impressive growth to improved water availability. “In addition to improved yields, better return to the farmers on account of higher prices of most of the crops was another prominent feature for agriculture during FY03.”

The report says that the industrial sector growth comfortably reached 5.4 per cent — the same as achieved in FY02. It says this happened due to an exceptional performance of large-scale manufacturing that grew 8.7 per cent during FY03 compared to 4.9 per cent in FY02.

National savings rose sharply to reach a respectable 18.5 per cent of GNP in FY03 as compared to 16.8 per cent in FY02. This improvement is mainly on the back of a substantial rise in net factor income from abroad due to acceleration in remittances.

Domestic savings, however, decelerated — falling from 16.7 per cent of GDP in FY02 to 15.5 per cent in FY03.

Total investment grew by 16.2 per cent during FY03, showing the strongest rise during the last six years against an anaemic 0.4 per cent in FY02.

PRICES: Inflation as measured by the change in consumer price index (CPI) decelerated during FY03, to 3.1 per cent compared to 3.5 per cent in FY02. “While both food and non-food components of inflation saw a visible decline during FY03, it was the former that witnessed a sharper fall,” says the report.

PUBLIC FINANCE: Fiscal accounts showed a marked improvement during FY03 as fiscal deficit fell to 4.4 per cent of GDP compared to 5.4 per cent during FY02. “Encouragingly the larger part of the improvement stemmed from a sharp jump in revenues,” the report says. It adds that consolidated tax receipts in particular depicted a 16.2 per cent (Rs77.7 billion) year-on-year increase during FY03, considerably higher than 8.3 per cent (Rs36.5 billion) growth recorded in FY02. The non-tax revenues also recorded a healthy growth of 13 per cent (Rs18.9 billion), consequently boosting the total revenue to GDP ratio to 17.7 in FY03 compared with 17.2 per cent in FY02.

BALANCE OF PAYMENTS: Current and capital account surpluses together contributed to an overall FY03 balance of payment surplus of $4.6 billion or 6.7 per cent of GDP. “The dominant contribution to this spectacular performance was from current account components, including workers remittances, a sharp fall in interest payments, robust non-structural inflows and substantial growth in export earnings.”

As a result, the current account balance to GDP ratio improved from 4.8 per cent in FY02 to 5.9 per cent in FY03. Exports increased to a record $11.1 billion and workers remittances also rose to an all-time high of $4.2 billion.

The rupee appreciated gradually by 3.9 per cent against the US dollar during FY03, substantially lower than 6.7 per cent witnessed in FY02.

DOMESTIC DEBT: Pakistan’s debt profile witnessed a significant improvement for the second successive year in FY03. The most important developments were the sharp reduction in the cost of debt and the lengthening of the maturity profile which ultimately reduced the dependence on external debt and resulted into a sharp fall in the debt to GDP ratio.

In fact, the growth in Pakistan’s overall debt stock has slowed significantly in recent years, driven primarily by the government’s improved fiscal position, pre-payments of expensive debt and the strengthening domestic currency. This was also evident in FY03 which saw the stock of public debt rise by only 1.0 per cent (Rs38.7 billion) by end-June 2003, pushing down the debt-to-GDP ratio from 104.3 per cent in FY02 to 95.1 per cent in FY03.