KARACHI: The government achieved a sustainable high economic growth rate in 2016-17, but declining exports and low tax collection emerged as the main challenges to fiscal and current account balances, according to the State Bank of Pakistan (SBP).
Released on Friday, the SBP’s third quarterly report on the state of the economy said the recent fiscal incentives appeared to be counterproductive as they led to deceleration in tax collection.
“Low tax collection is another challenge faced by the economy. Recent fiscal incentives for investment, exports and domestic production have led to a deceleration in tax collection. While the importance of such fiscal relief measures to support growth cannot be overemphasised, concerted efforts are required to further improve efficiency of the tax system,” said the SBP report.
Both the challenges – decline in exports and below-target tax collection – are impacting two key macroeconomic balances ie current account and fiscal. In order to maintain the growth momentum and hard-earned economic stabilisation, these balances need to be kept at sustainable levels, the report said. The fiscal deficit stood at 3.9 per cent of GDP in Jul-Mar compared with 3.5pc in the corresponding period last year.
Says recent fiscal incentives led to deceleration in tax collection and appear to be counterproductive
“This was despite a surplus of Rs227.6 billion provided by provinces during this period. In fact, revenue collection could not buoy up with the growing economic activities and fiscal needs. Particularly, Federal Board of Revenue (FBR) taxes showed a growth of 8.2pc in Jul-Mar, which was half the growth observed last year,” said the report.
The report said that while the imports of machinery, raw material and other capital goods bode well for the growth potential of the country, these could not be financed completely from non-debt-creating foreign exchange inflows, such as exports, remittances and foreign direct investment (FDI).
“While the country continued to enjoy international financial institutions’ (IFIs) support and access to international capital markets, these inflows were not sufficient to finance the higher current account deficit. As such, SBP’s foreign exchange reserves declined from $18.1bn at the end of June 2016 to $15.3bn on June 9,” said the SBP report.
It is imperative to exploit all sources of foreign exchange inflows – most importantly exports – in order to comfortably finance the rising import demand, it said. “Pakistan’s exports have been afflicted by a number of structural, institutional and entrepreneurial gaps, which have constrained the country’s competitiveness for the last many years.”
The growth prospects of Pakistan’s economy from 2017-18 onwards would largely hinge upon planned infrastructure projects and capacity expansion by industries, said the SBP.
In order to make these plans a success story, enhanced coordination amongst all public-sector institutions would be more crucial, it said. Continuity and consistency in policies, especially those related to investment and industry, would be necessary to ensure sustainability of the growth momentum, it added.
The report said the 5.3pc economic growth rate was achieved by strong performance of agriculture and services as their growth rates were 3.5pc and 6pc, respectively, in 2016-17.
The industrial sector posted a growth of 5pc in 2016-17 compared with 5.8pc last year. This moderation came mainly from the decline in growth rates of mining and quarrying and electricity and gas sub-sectors. Against this, the large-scale manufacturing sector, a key contributor to industry, grew 4.9pc in 2016-17 against 2.9pc last year.
Higher growth in agriculture and industry also had a positive impact on the performance of the services sector, with wholesale and retail trade a key beneficiary, it said.
Published in Dawn, July 1st, 2017