KARACHI, March 20: The State Bank of Pakistan says the outlook on domestic growth has not shown perceptible signs of improvement in the first half of this fiscal year and warns that exports may also fall further in the second half.
“Despite increased foreign assistance and favourable external developments the outlook on domestic growth, investment, budgetary revenues and employment still does not show perceptible signs of improvement,” says the second quarter report of the SBP released here on Wednesday. “This reinforces our belief that the favourable external sector should not lull us in a false sense of complacency.”
In the external sector the balance of payments registered a dramatic improvement during the first half of this fiscal despite a marginal decline in exports.
The current account showed a surplus of $1.27 billion in July- December 2001 against a deficit of $262 million recorded in July- December 2000. The overall balance of payments showed a surplus of $751 million — “a feat that has rarely been achieved before.”
Foreign exchange reserves also shot up to a historic high of $4.8bn at end-December from $3.2bn at end-June 2001.
“The developments in the external sector have also improved the outlook for foreign direct and portfolio investment which has been reflected in the upgrading of Pakistan’s credit rating by Moody’s,” says the report. Net foreign investment has already increased by $148m during the first half of this fiscal year up from $74.7m a year ago. And home remittances or the money sent back home by overseas Pakistanis shot up to $983 million in July-December 2001 from $609m in July-December 2000.
The report says the improvement in creditworthiness following Paris Club agreement, ongoing implementation of PRGF, and reserve accumulation should provide sufficient signals for expected turnaround in the real sector of the economy. “But this is still not obvious and cannot be taken for granted. There are still many unknowns and imponderables such as the performance of the textile sector, the size of wheat crop, resumption of export business.”
“Exports are likely to decline further” in the second half of this fiscal “because of the lagged impact of cancelled export orders and less than anticipated access to western markets (especially the US),” warns the report.
Although growth in large-scale manufacturing during the first half of this fiscal year may be shored up by stronger value addition in sugar, “the extent of this rebound will also depend on the performance of the textile sector.”
The report underlines the need for maintaining macroeconomic stability achieved so far phasing out the fiscal and current account deficit and keeping inflation low. “In this respect the restructuring of CBR is of foremost importance to strengthen revenues and enhance tax bases,” it says.
Inflation as measured by consumer price index (CPI) stood at 2.2 per cent during the first half of this fiscal year down from five per cent in the same period of last year.
The report calls for speeding up the process of privatization “especially by transferring UBL and KESC to the private sector in the short-term and making other institutions ready for this exercise.” It also calls for implementing the poverty alleviation agenda “through broad-based economic growth, investment in human development and targetted interventions.”
The report says that gains from improved economic governance should be institutionalized adding that this improvement can be achieved through provision of level playing field, transparency in decision making and predictability and continuity of economic policies. “This is a daunting agenda and temporary gains should not distract us from pursuing reforms vigorously,” warns the report.
“Looking ahead, Pakistan should not deviate for a moment from the course of economic reforms and restructuring that aimed at enhancing the competitiveness of its real and financial sectors.”
“In particular it should continue the process of building its institutional strengths and improving economic fundamentals, and reduce the perceived country risk.”
The report says this would require a three-pronged approach: continued implementation of prudent macroeconomic policies; vigorous pursuit of sectoral reforms; and focused interventions for poverty alleviation.
2nd QUARTER REVIEW:
AGRICULTURE: The SBP report says that major crops are likely to grow by only 1.2 per cent and that too if wheat crop results in targetted production of 20m tonnes.
This should enable the agriculture sector in the country to attain about 2.5 per cent growth during this fiscal year—up from a negative growth of 2.5 per cent last year.
The report says that looming spectre of drought continued to haunt farming activities and rice crop fell to below 3.8 million tonnes showing a fall of 21.2 per cent — unprecedented since 1973- 74. It says that severe infestation of bollworm in Punjab also reduced the total cotton crop by 1.6 per cent. “Hopes for recovery in major crops now depend on wheat.”
LARGE SCALE MANUFACTURING: The Large scale manufacturing showed a marginally higher growth at 2.9 per cent during the first half of this fiscal compared to 2 per cent in the same period of last fiscal. “However, it would be premature to interpret it as a sign of improvement.
Alternative indicators...that are more relevant...seem to indicate marked deceleration in manufacturing activities,” says the report. But it acknowledges the fact that “prospects of reconstruction in Afghanistan may spur production, especially of cement, in the second half of the current fiscal year and onwards.”
TAX REVENUE: The SBP report says that fiscal efforts of the government were severely affected in the aftermath of Sept 11.
It says that total tax collection stood at Rs174.5bn in the first half of this fiscal year — down by Rs7.5bn compared to the tax collection in the first half of fiscal 2000- 01.
NON-TAX REVENUE: Non-tax revenue collected during the first half of this fiscal stood at Rs54.9bn which was only 42 per cent of the annual target of Rs129.8bn.
Out of the Rs54.9bn non-tax revenue Rs12bn was the SBP profit transferred to the government account.
This was in line with the annual target of Rs24bn. “All other components (of non-tax revenue) were lower than the targets.”
BUDGET DEFICIT: The SBP report says that consolidated budget deficit stood at Rs99.9bn during the first half of this fiscal year.
This constitutes a little more than 50 per cent of the annual budget deficit target of Rs186.9bn.
“The push towards higher deficit came from revenue side,” says the report adding that on expenditure side the government succeeded in keeping the expenditures at 43 per cent of the annual target.
Tax and non-tax revenue collection combined totalled Rs263.9bn during the first half of this fiscal year against the annual target of Rs657.9bn. The expenditures stood at Rs363.8bn against the annual target of Rs844.8bn.
The report says that despite (disturbing) developments along the Afghan border and escalating tension with India only 41.2 per cent of budgeted defence expenditures were utilized during the first half of the current fiscal year.
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