ISLAMABAD - Pakistan Institute of Development Economics (PIDE) in its report has observed that country’s economy remains in a precarious state with sluggish growth, fragile macroeconomic fundamentals, and heightened vulnerability to balance of payments shocks despite some positive developments including easing of inflation and reduction in fiscal deficit.
According to macroeconomic brief released on Thursday, key problems afflicting the economy including energy shortages and a host of structural impediments that have held back investment and growth have not been tackled effectively, showing signs of bad governance and policy inertia. More worryingly, with the government embroiled in political controversies and election year approaching, pressing economic issues are likely to remain on backburner dimming hopes of a reversal in economic situation at least in the near term. At the same time, government may be tempted to adopt populist measures ahead of elections that could further compound economic difficulties. Challenging times thus lie ahead.
After a prolonged spell of tight monetary policy, inflation eased to 9.7 percent in December 2011 from 15.5 percent in December 2010 on a year-on-year basis. Citing reduced inflationary pressures, The State Bank of Pakistan moved rather aggressively to cut the policy rate by a cumulative 200 basis points to 12 percent in September 2011. Since then, the SBP has rightly signaled a more cautious approach by keeping its policy rate unchanged. There are significant risks to inflation outlook emanating from weak supply response as a result of power shortages, recent hike in fuel and energy prices and pass through of currency depreciation. In this scenario, monetary policy needs to be carefully calibrated to balance the objectives of robust growth and price stability.
Economic growth remains stunted as energy shortages have continued to inflict a heavy toll on the economy. Though the large scale-manufacturing sector has shown a modest recovery, its growth remains far below potential. The agriculture sector appears to be recovering from the aftermath of floods and is expected to achieve its target growth of 3.4 percent in FY12 due mainly to expected increase in the production of rice and sugarcane. Despite this however, the economy is likely to miss the overall growth target of 4.2 percent in FY12 with the intensification of energy crisis in the recent months and continued weaknesses in the manufacturing sector.
Despite an easing of interest rates, demand for credit by the private sector remains depressed indicating sluggish investment activity. The loans to private sector shrank by Rs 9.1 billion during July-Nov FY12 as against an expansion of Rs 73.6 billion during the same period in FY11. To be sure, this could also reflect bottlenecks on the supply side of credit especially banks’ increasing proclivity towards risk free government securities especially.
According to report, though the government managed to reduce the fiscal deficit in the first half of FY12, the target for fiscal deficit at 4.7 percent of GDP is unlikely to be achieved with slow growth in revenue collection, continuing losses of the state owned enterprises, and increased pressure on public spending ahead of the elections. The preliminary data for tax collection show that much of the increase in tax collection is accounted for by sales tax on rising imports of petroleum and fertilizers and that this increase is unlikely to be matched by tax collection from domestic sources in view of sluggish economic activity in the commodity producing sectors. The Federal Bureau of Revenue’s (FBR) target of Rs 1,952.3 billion for the current fiscal year thus looks rather optimistic. On the expenditure side, government continues to pour billions into the haemorrhaging state-owned enterprises, which together with sticky current expenditures leaves little room for curtailing public spending. The government’s fiscal troubles do not end here. With fiscal decentralisation, the state of provincial public finances can have important repercussions for overall fiscal stability. So far, the provincial gets are reportedly in deficit as revenue growth has been slow and, if this trend continues, provinces would be unable to generate required surpluses thus putting further pressure on government finances. Furthermore, the government may be inclined to ramp up public spending in the coming months to gain popular support thus imperiling already strained fiscal balances.
The report further stated that in its efforts to achieve better coordination between fiscal and monetary policies, government has curtailed its borrowings from the central bank in recent months. What is disturbing however is that this has been achieved on the back of escalating government borrowing from the commercial banks: public borrowing from commercial banks increased sharply from Rs 61.3 billion in July-November FY11 to Rs 665.0 billion in July-November FY12 while the government debt through the banking system during this period increased by Rs 500.7 billion. Worse still, public borrowing from the commercial banks has been helped by massive liquidity injections by the central bank. Such a policy is clearly counter-productive as it crowds out private investment on the one hand and erodes effectiveness of monetary policy to control inflation on the other.
Pakistan’s macroeconomic imbalances are rooted in deep structural problems-poor tax collection with narrow tax base, massive leakages in state-owned enterprises, low savings and lack of export diversification, to name just a few-and unless these are effectively addressed macroeconomic stability cannot be achieved on a sustained basis. There can be no exaggerating fact that there is an urgent need to improve tax to GDP ratio through widening tax net, rationalising tax rates, streamlining tax administration and removing exemptions. Similarly restructuring of state-owned enterprises must receive the highest priority. There are solutions available, short of full scale privatisation, including public-private partnership and restructuring and corporatisation of these enterprises through independent and professional boards of directors.  To encourage domestic savings, there is a need to deepen financial sector with improved variety of savings instruments that can provide better choice and incentives for savers. On the external front, Pakistan’s balance of payments position would continue to remain vulnerable to external shocks as long as weaknesses in export sector including high concentration in a few products persist. Looking forward, with the elections approaching, there is considerable uncertainty prevailing about the future course of economic policies.
The major political parties have largely confined their attention to popular sloganeering and have not come up with their detailed economic strategies so far. They would be better advised to clearly spell out their economic visions along with coherent macroeconomic frameworks and economic policies and programmes for accelerating economic growth and development