KARACHI: The country’s economy appears to have turned the corner. The State Bank says that after several years of low growth, sentiments about the economy seem to have improved during the third quarter of the outgoing fiscal year (FY14).

“Manifestations can be seen in the rebound in real GDP growth; a rise in private sector credit, a contained fiscal deficit, the subdued inflation outlook, a sharp increase in foreign exchange reserves and appreciation and subsequent stability in the exchange rate,” the SBP said in its 3rd quarterly report issued on Thursday.

The bank praised the government for steps taken to improve the economy but asked it to improve the tax-to-GDP ratio.

While this change in sentiments could be traced to a one-off bilateral grant, a series of events appeared to have consolidated this positive turn, the SBP said. For example, the government’s resolve to address the energy shortage, a growing perception of business-friendly policies and external inflows that have been anticipated for many years, have recently been realised.

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More specifically, the report said, auction of 3G/4G licences, a larger than projected inflow via Eurobond, programme loans from the international financial institutions and SBP’s efforts to support the foreign exchange reserves have sharply improved the outlook of the country’s external sector and, to some extent, its fiscal position.

However, at the end of its review note, the SBP said: “So far it seems that the task of keeping a stressed economy moving forward has dominated policy thinking and formulation. The recent positive developments and improvement in sentiments provide a strong base for future growth.

“Policymakers should stay the course towards inclusive growth while taking the harder steps to create a larger and more equitable tax base, fix the energy sector, create an environment that will absorb the growing number of job-seekers and project Pakistan more competitively in the international markets.”

The report said the revival of economic activity was a key development in FY14, with real GDP growth of 4.1 per cent – the highest over the past five years. But this growth was not broad-based; it was driven primarily by construction and large-scale manufacturing (LSM).

Even the LSM growth came largely from two items (sugar and fertiliser) which was realised in the first half of FY14 and not likely to be sustained in the second half.

This uneven growth could be traced to structural imbalances that needed to be addressed, the report said. After five years of sluggish economic activity, the economy posted a real GDP growth of 4.1pc in FY14.

The momentum came from the industrial sector which grew by 5.8pc in FY14, compared to an average growth of only 1.3pc since FY08. The growth was also higher than the 4.8pc target set in the Annual Plan for FY14.

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However, services and agriculture, which grew by 4.3pc and 2.1pc, respectively, could not achieve their target.

Looking at the national income accounts for FY14, private consumption that increased by 5.9pc was the driving force behind the economic growth. It was more than double what was realised in FY13.

Nevertheless, real investment grew by only 1pc and because of this the investment-to-GDP ratio declined to 12.4pc in FY14 from 13pc last year.

“In our view, Pakistan’s investment rate will increase only by addressing the law and order situation in the country, ending energy shortage and improving business sentiments. Furthermore, there is no getting away from the fact that Pakistan has no choice but to increase its tax-to-GDP ratio,” the SBP said.

The report said that there was an urgent need to eliminate tax exemptions, clamp down on corruption and leakages in the tax collection machinery, expand the tax base by including all productive sectors of the economy and enhance the independence and professional capacity of provincial tax authorities.

Published in Dawn, July 11th, 2014