KARACHI

After many years of low growth, sentiments about the economy seem to have improved, said State Bank of Pakistan Third Quarterly Report for FY14 released on Thursday.

The report said that revival of economic activity is a key development in FY14, with real GDP growth of 4.1 percent which is the highest in the past five years.

While acknowledging the improvement, the Report emphasised the need to address structural problems that continue to plague Pakistan’s economy.

The policymakers should formulate an Industrial Policy that prioritises production efficiency and job creation.  Such an initiative should focus on: efforts to promote competitiveness, instead of a culture that creates and rewards inefficiencies; restructure loss-making PSEs (especially Gencos and Discos in the power sector; and PIA and Railways in transportation sector) to make them more dynamic and profitable; and create a skilled labour force that meets the current (and potential) needs of the manufacturing sector. The Report mentioned that improvements in the economy were the result of the government’s resolve to address the energy shortage, a growing perception of business friendly policies, and external inflows that have recently been realised.

More specifically, auction of 3G/4G licences; a larger than projected inflow via Eurobonds; programme loans from the IFIs; and SBP’s efforts to support the FX reserves, have sharply improved the outlook of the country’s external sector, and to some extent, its fiscal position.  However, the Report emphasised that “these signs of improvements should not discount the challenges faced by the economy; and efforts for much needed structural reforms should continue.

According to the Report, the recent influx of external resources not only stabilised the exchange rate, but also sharply increased SBP’s FX reserves, “as of 30th compared to only $3.5 billion as of end-December 2013.

The SBP Report said that fiscal deficit during the first nine months of FY14 was only 3.2 percent of GDP, which is significantly lower than the average deficit in the last five years.

The Report, however, pointed out that despite efforts for fiscal consolidation on the expenditure side, tax mobilisation still remains lackluster, as FBR is still operating on a narrow tax base. While the FBR should take concrete steps to plug tax leakages and increase documentation of all financial transactions, provincial governments (having constitutional right to tax services and agricultural income) also need to implement provincial taxes more effectively.

On the financing side, the Government mainly relied on domestic sources during Jul-Mar FY14. However, external financing has increased subsequently with the issuance of Eurobonds, fresh loans from IFIs, and bilateral assistance.

The SBP Report highlighted that total public debt (external plus domestic) has already crossed the limit of 60 percent of GDP, as set by the Fiscal Responsibility and Debt Limitation Act (2005) for FY13 onward. Hence, any addition to the external debt should at least be matched with an equivalent reduction in the domestic debt outstanding.