June 01, 2008	Sunday	Jamadi-ul-Awwal 26, 1429

KARACHI, May 31: The State Bank of Pakistan does not seem to be enthusiastic supporter of providing subsidies and views fiscal stabilisation necessary for sustaining growth momentum that is threatened by worsening macro-economic indicators in Pakistan.It has suggested that the economic policy needs to be focussed on improving the productivity of lagging sectors of agriculture and large-scale manufacturing to contain the domestic inflation. Thus, policy focus, it advocates, needs to remain on addressing structural impediments to expansion in the base of agriculture and manufacturing sector to support growth in medium-to-long term.

The SBP, in its third quarterly report for 2007-08 issued here on Saturday, admits inflation to be a serious policy concern for Pakistan as CPI inflation touched the highest-ever mark of 17.2 per cent YoY for April 2008 since April 1995.

The central bank in effect agrees with the perception of the development partners, the World Bank and the IMF. They have clearly been advocating limited targeted subsidies and phasing out of general subsidies on fuel and food.

“Even fiscal measures (tariff cuts and subsidies), aiming to at least partially protect the broad populace from rising food and energy commodity prices, are likely to prove unsustainable, given the already large fiscal deficit. Any such measure needs to be carefully targeted at only the very poor and vulnerable.”

The bank fears misuse of high cost subsidies for manipulating the market which could perpetuate imperfections and lead to further degeneration of macro-economic indicators.“Typically subsidies do not incentivize efficiency, raise fiscal costs, and often lead to gaming to maximise rent seeking rather than increased productivity. Therefore, policies must instead focus on structural reforms to reduce cost of doing business, ensure efficient provision of key inputs (water, power etc.), improvement of logistics chains, etc.,” the report states.

It favours policies to remove bottlenecks hampering the agriculture growth to achieve higher productivity to capitalise on surging international commodity prices. Besides the potential of services sector needs to be harnessed through apt policy interventions.

“In addition, significant gains in foreign exchange earnings may be achieved by boosting services exports, such as IT services, tourism, etc. and focusing on increasing remittances by benefiting from labour market opportunities in East Asian economies and the Middle East,” the report says.

It also suggests more conducive environment for better management of human resources to tackle the twin problem of poverty and unemployment.

“Productivity gains likely to be accrued from skilled labour will have spill-over effects in attracting FDI, enhancing workers’ remittances as well as increasing exports of goods and services.”