THE monetary policy statement for July-December-05 (MPS-05) issued on July 21 outlines the achievements in the economic field during fiscal 04-05 (FY-05) gives some projections for fiscal 05-06.
According to the MPS-05, the economy grew by 8.4 per cent during FY-05. The growth was broad-based and all segments of the economy contributed significantly to the GDP growth. Manufacturing grew by 12.5 per cent, agriculture sector by 7.5 per cent and the services sector by 7.9 per. In all cases, the targets were exceeded.
Similarly, the credit expanded by 30.6 per cent to Rs390.3 billion as against the original target of Rs200 billion fixed in July,2004.The share in credit expansion among various sectors has been put as shown in the table.
It has not been indicated as to which sector the balance sum of Rs94.4 billion (Rs390.3 billion–Rs295.9 billion) was lent by banks.
Strangely, the quantum of credit expansion in the agricultural sector has not been mentioned in the MPS-05. In the SBP third quarterly report for FY-05 (July 04- March,05),the disbursement to the agricultural sector during these nine months was put at Rs73.8 billion but the repayment amount was not mentioned.
The MPS-05 indicates that the SME sector benefited by credit expansion to the extent of Rs71.4 billion. It is not clear whether this credit expansion of Rs71.4 billion is included in the manufacturing sector figure of Rs153.2 billion. If so, the amount left for the large scale manufacturing sector will be only Rs81.8 billion (Rs153.2 billion–Rs71.4 billion).
If this figure of Rs71.4 billion is in addition to Rs153.2 billion, it shall raise the figure of credit expansion in various sectors, other than agricultural sector, to Rs367.3 billion (Rs295.9 billion + Rs71.4 billion) and thus will leave a sum of Rs23 million for the agricultural sector (Rs390.3 billion-Rs367.3 billion).
Out of Rs80.3 billion credit expansion in the consumer financing, Rs37.4 billion went to auto sector while Rs17.5 billion housing loans were given.
The inflation grew by nine per cent during FY-05 as against the original annual target of five per cent. The worst hit by inflation were the poor who spend the bulk of their earnings on food items. The food inflation rose by 14.9 per cent in July,04 but decelerated to 12.5 per cent in June,05.
The growth projections for the current fiscal FY-06 are: GDP seven per cent, manufacturing 11 per cent and agriculture sector 4.8 per cent. Inflation has been targeted at eight per cent. The credit to the private sector is projected to grow by 20 per cent to Rs330 billion.
The MPS-05 states that “increase in the inflationary tendencies was also evident in the rising trend of core inflation despite interest rate hikes throughout FY-05. It was for this reason that the SBP discount rate was raised to nine per cent in April,05. Following the substantial increase in interest rates inflation is expected to decelerate and come down to eight per cent”. The SBP discount rate is applicable when the banks approach the SBP for temporary financing for up to three days. The use of the discount rate is thus marginal.
As explained by the SBP Governor, Dr Ishrat Husain, the SBP discount rate has no correlation with the banks’ lending rate. And the bank lending rates are still lower than the discount rate. Therefore, at least up to this stage, the discount rate may not have played any role in containing or decelerating the inflation.
The MPS-05 enumerates the following factors which may contribute in achieving eight per cent inflation target:
(a) The increased supply of domestically produced goods as a result of continued and rapid GDP growth; (b) Capacity expansion and BMR in key industries; (c) Improved food supplies from substantial growth of 17.3 per cent in the production of major crops last year supplemented by duty free import of 11 essential food items from neighbouring countries;(d) Further improvement in the fiscal discipline through enactment of “Fiscal Responsibility and Debt Limitation Law along with sustained improvement in financial position of the public sector enterprises (PSE) and decline in revenue deficit;(e) Expectation of stable exchange rate on the back of sizeable foreign reserves and sustained inflow of workers’ remittance and FDI;(f) Increased productivity and efficiency of textile industry and ongoing expansion in automobile, electronic and cement industry.
The MPS-05 simultaneously keeps the margin for not achieving the inflation target enumerating the factors such as (a) capacity constraints in key industries like fertilizers, paper and board and steel (b) potential adverse impact of recent floods and heavy rains on essential food supplies (c) outlook of upward pressure on world oil prices and (d) substantial expansion in consumer loans.
The “Fiscal Responsibility and Debt Limitation Law ” requires the government to bring the public debt, domestic and external, up to a certain percentage of the GDP by a certain date. The economic managers already claim to have brought the debt: GDP ratio to 59.4 per cent during FY-05 (Economic Survey).
The GDP growth will enable them to resort to more borrowings, internally and externally, which they are already doing. Even if debt: GDP ratio was higher, the law would not have brought any impact within the short span of current fiscal. The enactment of the law will, presently, prove to be merely cosmetic.
The Public sector enterprises (PSE) like Wapda have continue to put demand on the government for subsidy which, if not sanctioned, will entail raise in the electricity prices. There would, therefore, be no room for comfort during FY-06.
The arrangements for duty-free import of food items from India have still not been finalized. In view of this and the reservations outlined in the MPs-05, one should only wait for the outcome.
No doubt, the SBP will be able to keep the exchange rate stabilized on the back of high foreign exchange reserves which will substantially grow during the current fiscal due to receipt of the sale proceeds of PTCL amounting to $2.6 billion and against the expected sale of profit earning national assets like Pakistan Steel and Pakistan State Oil Company. But such an internationalization of the national assets is not in the long term national interest. In the coming years, it will become serious burden for the country’s balance of payments in the shape of remittance of profit/dividend by the foreign stakeholders.
The external sector deteriorated during FY-05 as the balance of payments registered a deficit of $933 million after remaining surplus during the previous two years. Although the MPs-05 terms it as “mere $933 million” deficit, the sum of around $1 billion is not an small amount in the context of our receipts/payments in the external sector that could be dismissed so casually as the nation is well aware of the conditionalities which have to be accepted when we embark upon raising that much amount from outside Pakistan.