SCB puts stock in economic recovery


LAHORE: The economy will stage a recovery in the fiscal year 2011, but inflation, in double digits, will continue to imperil growth. The current account deficit is likely to decrease in the coming year. The economy will be able to sustain growth without assistance from the International Monetary Fund (IMF) but will need foreign financial assistance by 2012.
This was the economic outlook presented in the global annual report of Standard Chartered Bank (SCB) released in more than two dozen countries, spanning six continents.
The reformed General Sales Tax (GST) was deemed to be an important step, but not an adequate substitute for direct taxation, such as through wealth tax. The report also highlighted the strong need for diversification in foreign currency stocks and the need to maintain reserves of multiple currencies, rather than solely the US dollar.
SCB economist for Pakistan Sayem Ali, while speaking to Pakistan Today, stated that economic conditions would improve in 2011, but pointed out the need for focus on certain fundamentals. He stressed that current account deficit (CAD) which is presently two percent of Gross Domestic Produce (GDP) and is declining further.
He also indicated rupee is showing signs of strength; a positive sign for the economy. He was of the view that the US dollar is basically unstable and with gold prices increasing, called for officials to look beyond the greenback and consider other currencies.
Sayem Ali insisted that gold buying would be ill-considered; the price bubble might burst anytime, he reasoned. “Other countries are already maintaining reserves in different currencies therefore we would caution against complete reliance on the US dollar,” he said.
Sayem Ali was of the view that external debt, which is touching $56 billion, would ease. He was however alarmed by non-performing loans (NPL) which are increasing at alarming rate. “Presently, they are 14 percent of the banks’ assets are tied up in NPLs; next year, it could touch 15 percent, roughly, Rs 550 billion. “The central bank should work on curtailing NPLs,” he said adding that commercial bank’s assets are verging on Rs 4 trillion.
He stated Pakistan’s $11.3 billion IMF Stand-By Arrangement (SBA) will end in December 2010. Fundamental economic factors have improved, with foreign exchange reserves boosted to a record high of $17 billion. However, large external debt payments and a slowdown in foreign direct investment (FDI) inflows reveal that the economy remains vulnerable to balance-of-payments shocks.
He opined that there is a strong possibility that the government will seek further support from the IMF; a difficult and unpopular move. He said growth has been hampered in FY11 by the damage inflicted by heavy floods in August, leaving 20 million people homeless and causing widespread damage to crops and infrastructure.
The growth is likely to pick up in FY12 as reconstruction spending and record-high remittances kick in, which should sustain consumption spending, the SCB report said.
Sayem Ali said inflation remains the biggest risk to economic and political stability. The government revised up its headline inflation target for FY11 to 15 percent from 9.5 percent due to the crop damage caused by floods. “We expect CPI inflation to average 16 percent in FY11, exceeding the government target,” the SCB economist said adding the GST bill is a good step towards improving economy but remains a long term step, while in the short term it would increase inflation.
He indicated that the government should have put its weight behind the wealth tax; a better way of recovering tax. “Though RGST would enhance the tax net, it is an unpopular step,” he added.
He said fiscal consolidation is critical to curbing the amassing of public debt and restricting inflation. A revised sales tax, power subsidy cuts and a flood tax are measures outlined by the government which will contain the FY11 deficit to 4.7 percent of GDP from 6.3 percent in FY10. “We expect the FY11 deficit to remain high, at 6 percent of GDP, given the likely shortfall in tax revenues and higher debt-servicing costs as borrowing costs rise,” he said adding monetary policy will likely remain hawkish, given inflation risks.
He stated that the free-float exchange rate regime has worked well for the rupee, resulting in an increase in the foreign exchange reserves to a $17 billion. “The rupee depreciated 2.4 percent in 2010, 8 percent in 2009 and 28 percent in 2008,” he added.