KARACHI, June 12: In a somewhat cautious optimism, the State Bank of Pakistan expects the GDP growth in the current fiscal year to ‘comfortably’ exceed 3 per cent mark supported by 3.2 per cent growth in large scale industry, and a small revival in agricultural output.
The SBP in its third quarterly report for the year 2001-2002 released on Wednesday, incidentally only a day ahead of the release of Economic Survey due on Thursday, maintains cautious approach in its assessment of the national economy.
The report terms an indicated growth of 3.2 per cent in the large scale economy during current fiscal as against 7.6 per cent in the last fiscal “reasonable under the circumstances”.
Early rains in kharif averted a fall in the agricultural output where a small revival in cotton, sugarcane and wheat and in non-crop sector was witnessed. A large part of the agricultural recovery during current fiscal year is attributable to kharif crop.
“Situation of the economy is far from satisfactory,” the SBP report observes while referring to water shortages once again bedevilling the agricultural sector, pulling down a potentially more impressive recovery.
Stressing that agriculture will remain at the heart of the domestic economy, the SBP report calls for urgent attention to improving the infrastructure of agriculture sector. It says that if the economy is to sustain substantial growth in future, better water storages and supply facilities, enhanced access to credit, increased capacities for storage of food grains and crop insurance are necessary.
The report views large scale manufacturing growth “a little disappointing” in context of improving macroeconomic fundamentals. But then it attributes the slump of some of the sub sectors of large scale industry to the turmoils witnessed during October-December period in the domestic and export market.
In this utter dismal backdrop, a broad-based improvement in country’s external account continued showing an unprecedented surplus of 2,095 million dollars and a fall in Pakistan’s external debts and liabilities —first visible sign of the country’s progress in moving out of debt trap—are the “most unambiguous positive for the economy.”
Improvement in external account is attributed to a reduced trade deficit, substantial decline in the services account and a large rise in the current transfers. The SBP report makes a particular reference to the workers remittances remaining approximately twice the corresponding levels of the previous years.
“In fact, the net inflows were sufficient to warrant a further substantial appreciation of rupee,” the report says while pointing out that “were it not for the SBP’s conscious decision to purchase heavily in the inter-bank market in order to boost reserves and to protect exporters.”
The external account improvement provided an enabling environment for the SBP’s looser monetary stance in the current fiscal year allowing the central bank to accelerate downtrend in domestic interest rates in response to the shocks to the economy due to events in the second quarter October-December 2001.
The report projects a fall of two billion dollars in Pakistan’s external debt and liabilities compared to 37.9 billion dollars debt liabilities in the year 2000. Although, the debt component has actually risen by 768 million dollars, due to positive net inflows from international institutions, this has been offset by a much larger 2.8 billion dollars fall in foreign currency liabilities. The SBP terms the rise in debt a part of the strategy to lower country’s external debt servicing burden, by substituting very expensive debts with soft loans.
The SBP report emphasizes the restructuring of the Central Board of Revenue and broadening of tax base as imperative while pointing out that a notable weak area of the economy has been the government revenue with net tax collection falling 5 per cent short of even the thrice-adjusted Rs414.2 billion target for the current fiscal year.
The report attributes this fall in revenue collection to enhanced payment of refunds, a large part of which comprised arrears. But then the gross collection rose only by 3.5 per cent in year on year terms during nine months of 01-02. The value of dutiable imports are likely to remain low.
The SBP warns that if the CBR was restructured and tax base was not broadened, fiscal deficits will continue to erode macroeconomic gains directly. The only way to control fiscal deficit is to lower development expenditure which will lead to general deterioration of the infrastructure.
While lauding the cumulative surplus in external account swelling to unprecedented 2,095 million dollars including 820 million dollars in January to March 2002 period, the SBP calls for viewing this positive development with “degree of caution”.
“The challenges ahead are difficult,” it says loudly while pointing out that lower trade deficit is quite narrowly based on low import of sugar and considerable decline of oil prices. “One bad sugarcane crop and a sharp jump in oil prices could easily leave the trade balance in red again,” warns the SBP report.
The services sector is bolstered by 300 million dollars payment on account of providing base facilities to the US soldiers policing Afghanistan. Another amount of 600 million dollars is the non-repeating US grant.
More impressive and somewhat durable gain appears to be on account of remittances which have roughly doubled as the kerb market premium plummeted and the informal money transfers drew greater regulatory scrutiny internationally.
The report says that SBP intends to facilitate setting up of foreign exchange companies by next year to capture a large part of potential remittances that currently flow into the informal sector.
The increase in quantum of exports is another noteworthy factor but the decline in unit value of textile products has not allowed higher earnings.
The SBP reiterates the economic reforms agenda which includes financial discipline, aggressive strategy to consolidate the gain in external sector, restructuring CBR, privatization of key state owned enterprises (public sector banks, KESC, PTCL) curtailment of losses in the public sector and increased public sector development expenditure particularly in water storages and conservation.