KARACHI, July 15: The government has been cautioned regarding the possibility of increase in inflationary pressures, the gradual weakness in fiscal indicators and the widening of the current account deficit.
The Third Quarterly (July-March 2005-06) Report of the State Bank of Pakistan released on Saturday, showed concerns that those factors could pose a challenge to the prospects of long-term growth of Pakistan if the government fails to do the needful to check the trends.
The report titled “The state of Pakistan’s economy”, based on the estimates of performance of key sectors over the first nine months of the last fiscal year 2005-06, has come after four months of the close of the year under report.
The earlier document ‘Pakistan Economic Survey’ that was released by the government just before the budget 2006-07 in June covered the performance of first 10 months (July-April) of FY06.
The SBP report thought the growth momentum had sustained, as reflected by the estimates, with real GDP growth exceeding 6pc for the third year in a row. It noted slower agricultural growth compared with less than targeted growth of 7pc in the period under review. The SBP, nonetheless, considered the GDP growth as impressive. “… this is quite impressive given the aftermath of the earthquake, the relatively poor harvests of key crops, the impact of high oil prices and rising interest rates”.
Among key sectors the greatest contribution to the growth rate was by the services sector that grew by 8.8pc as compared to 4.3pc growth of commodity-producing sectors in the same period.
The SBP report though dwells on inflation, it does not find that to be too problematic an issue as the tighter monetary policy has led to a deceleration in private sector credit resulting in relative slowdown in aggregate demand. Supply-side situation has improved owing to better wheat harvest and prudent administrative measures. The latter include guard against market manipulation by cartels, which helped in reducing inflationary pressures in the economy. “CPI inflation has dropped from 11.1pc YoY
in April 2005 to 7.1pc in May 2006”.
The report sees rising fiscal deficit as more alarming. “The concern stems from the fact that the tax net has seen little broadening in recent years, and continues to exclude (or under-tax) a substantial portion of the economy” the central bank notes.
The report suggests that “the lack of buoyancy in the tax receipts needs to be addressed while the economy is still strong, as the costs of redistribution of the tax base are more palatable as long as sectoral profitability of hitherto under-taxed areas remains strong. Such measures would also strengthen the competitiveness of other sectors of the economy by allowing the government to reduce the tax burden in these sectors that currently carry a disproportionate share of the tax burden”.
The SBP report considers current account deficit as “posing a more immediate policy dilemma”. The bank, however, considers the phenomenon to be inextricably linked with the strength of the domestic economy. It considers policy options to be “correspondingly complex”.
In the days ahead, economists would of course look in microscopic details whether the SBP’s current report is complete and correct, both in substance and form.