LAHORE: The State Bank of Pakistan’s Monetary Policy Statement (MPS) takes an overly optimistic view of the government’s economic performance and ignores shortfalls which would hinder progress over the next three months of this fiscal year.

“As an autonomous institution, it is expected that the SBP would take notice of performance lapses. A positive story cannot replace sound policy or change indicators of economic trends,” says a reading from a fact-sheet released on Friday by the Institute for Policy Reforms (IPR) on the MPS for March 2015.

The MPS estimates that growth rate will exceed FY14 outcome of 4.1pc. It is not clear how this growth rate will be achieved as in the first seven months, large-scale manufacturing showed sluggish growth rate while the agricultural sector has been hit by floods (albeit less than originally anticipated).

According to IPR, it will be surprising if the agricultural sector registers a growth rate of more than three per cent in 2014-15.

According to MPS, the inflation has come down from 8.2pc in June 2014 to 3.2pc in Feb 2015. However, this is mostly because of precipitous decline in international oil prices.

The inflation rate will rise in the next few months since international oil prices have risen by 20pc in February and because of higher gas prices, accompanied by high procurement price of wheat.

The MPS fails to highlight the high level of government borrowings from commercial banks in FY15, which has led to a ‘crowding out’ of credit to the private sector.

The retirement of commodity financing is slow at Rs55 billion as compared to Rs133bn last year. The wheat export was not possible, despite subsidy, because of its low price in the international market.

The MPS praises the government for restricting fiscal deficit to 2.2pc of the GDP, in the first half of 2014-15. The reason for this is the limit on expenditure. There is a negative growth in expenditure of debt-servicing, and releases for PSDP are only 24pc of the annual target in the first six months.

The IPR estimates that the fiscal deficit in the first eight months has jumped to 3.7pc of the GDP. It seems likely that the deficit will exceed 4.9pc of the GDP in 2014-15. The FBR will fall short by almost Rs200bn in meeting the annual target. Moreover, on March 6, 2015, the cash surplus of the four provincial governments combined is only Rs77bn, well below the budgeted amount.

The MPS highlights decline in the current account deficit in the first eight months of 2014-15. The decline in exports has been more than compensated by the buoyancy of home remittances, fall in imports, large CSF payment, and other inflows, like the Ijara-Sukuk bond flotation and releases from the IMF.

The foreign direct investment has stopped growing. Net external concessional assistance from traditional donors too has decreased. Therefore, the financial account of the balance of payments has become more vulnerable.

Finally the rupee has risen in value with respect to euro. Can Pakistan retain its competitiveness in the EU, despite the presence of GSP Plus? The SBP will need to explain its exchange rate policy, it says.

Published in Dawn, March 28th, 2015

On a mobile phone? Get the Dawn Mobile App: Apple Store | Google Play