SBP calls for ‘industrial policy’ as priority

Updated October 29, 2019

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"State must take leading role to invest in important segments of the economy," SBP says in its annual report. — APP/File
"State must take leading role to invest in important segments of the economy," SBP says in its annual report. — APP/File

KARACHI: The State Bank of Pakistan (SBP) in its annual report on Monday said the rising share of services sector, at the expense of industry and agriculture, needs to be addressed while forecasting the GDP growth for FY20 between three and four per cent.

According to the report, the country largely produces non-tradable services which are consumed domestically. At the same time, industrial output, exports and FDI have faltered, it added.

“This pattern needs to be corrected in order to make trade deficit sustainable in the years to come. Putting in place a coherent industrial policy should be among the immediate priorities, while a gradual shift away from non-tradable services in favour of exportable services should also be pursued in the medium term,” said the SBP.

The services sector grew by 4.7pc during FY19, missing the annual target by 1.8 percentage points (6.2pc in FY18). This was the most noticeable deviation between the actual and targeted growth rate of services in the past few years, said the report.

‘State must take leading role to invest in important segments of the economy’

“The state must take a leading role to invest in important segments of the economy in order to provide the private sector with a dependable and conducive ecosystem in which to carry out R&D (Research and Development) and capital formation activities,” it continued.

Macroeconomic stabilisation will continue to be the cornerstone of economic policy during FY20, said the report, adding that the real GDP growth is likely to remain subdued, and though the early signs of recovery are already visible.

“Development spending may play a pivotal role, since there has been an observed tendency that Pakistan’s GDP growth and [Public Sector Development Programme] PSDP spending move in the same direction, and similar has been the case in FY19,” the publication notes.

The current account deficit, after shrinking on yearly basis during FY19, is anticipated to subside further in FY20, while exports are projected to pick up during the year. The FTA-II (Free Trade Agreement) with China and preferential trade agreement with Indonesia may also give a boost to exports.

According to SBP, achieving the ambitious tax collection target in the middle of a broader economic slowdown may present a challenge.

“Even if things pan out more or less according to plan, the fiscal deficit may be in the neighbourhood of 7pc,” the report stated.

The growth in industrial sector slowed down from 4.9pc in FY18 to 1.4pc in FY19. Major drag came from the manufacturing subsector, which carries the highest weight in the industrial sector.

The report said that besides the tangible factors behind the economic moderation, a sense of unease remained a persistent theme for most of the year (FY19), stirred up by a number of underlying factors.

These included: speculations on the signing of the International Monetary Fund programme; anxiety over possible implications of Financial Action Task Force reviews; uncertainty regarding currency depreciation; and cross-border tensions with India. These developments deflated the confidence of businesses and consumers, unsettled the currency and equity markets, and in some cases inadvertently caused a flight towards greater informality.

“In the big picture, though real GDP growth picked up during FY17 and FY18, the sharp downturn in FY19 highlighted the fact that the economic expansion in these years had not been based on a sustainable strategy and was susceptible to various stabilisation measures, such as the cut in development expenditure,” said the report, adding that it has exposed the structural deficiencies faced by the economy yet again, requiring immediate policy attention.

The report said the agriculture sector registered a marginal growth of 0.8pc during FY19, in sharp contrast to 3.9pc a year earlier. This was primarily due to a contraction in the production of the crop sector.

Published in Dawn, October 29th, 2019