Political ‘intangibles’ driving Pakistan’s economic fate

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Soft international commodity prices and the ever-burgeoning remittances are expected to rid the dollar-hungry economy of its current account woes in FY 13, but political “intangibles,” weeks ahead of the May 11 general elections, appear to be dominating the country’s economic fortune, according to State Bank of Pakistan (SBP) quarterly reports.
Concerned over “persistent structural problems” that keep haunting the ailing economy, the central bank said local investors were reluctant to go for long-term investment because of the pre-polls uncertainty looming large on the country’s political spectrum.
“Intangibles appear to be dominating Pakistan’s economic outlook,” the State Bank of Pakistan (SBP) observed in its quarterly reports, jointly issued on Saturday for the July-Dec FY 13 ‘State of Economy’.
“With a caretaker government paving the way for general elections in May 2013, domestic investors are understandably reluctant to take a long-term view,” it said adding that “this uncertainty cannot be denied”.
The regulator said it was a must for the caretaker government to prioritise addressing stubborn structural problems in public sector enterprises and the energy sector.
Similarly, it said, concrete steps were needed to enhance the resource-constrained country’s revenue collection in an equitable manner.
The bank lamented that the July-Dec period although saw the FBR collecting only 5.7 percent more taxes, the outgoing political government’s current expenditures had grown by 31 percent in the first quarter only.
Recording the country’s domestic debt, swelling by Rs 691 billion in 1HFY13, the central bank said the cash-strapped government depended on the state bank for budgetary support during the second quarter. “The fiscal picture explains the federal government’s compulsion to borrow,” it said.
The consolidated fiscal deficit in the first half of fiscal year 2013, the bank said, was to widen by 2.6 percent of the GDP, owing to the inflow of $ 1.8 billion in Coalition Support Fund from the United States.
The review period saw the country’s external debt contracting by $ 1.9 billion, of which $ 1.3 billion was owed to the IMF. Repayments sans fresh inflows pressured the country’s Balance of Payment and exchange rate that, ideally, should be countered by running a much larger current account surplus.
Terming trade flows as “benign” for in the said time period, the SBP said the dollar-hungry country’s import bill had shrunk by 3.3 percent due to decreased imports and softer commodity prices.
The textile exports upped by 8.6 percent owing partly to the duty-free access granted to Pakistan by the European Union (EU) in November 2012.
However, the country’s falling dollar reserves, the bank said, were giving way to “perceived vulnerabilities” in the external sector. “It is not the size of the current account imbalance, but the fall in foreign exchange reserves that is dampening sentiments,” the central bank said.
The scheduled repayments to IMF pulled down the SBP’s dollar reserves by $ 1.8 billion despite a current account surplus of $ 218 million in 1HFY13.
“The fall in reserves has occasionally exerted pressure on the rupee-dollar parity coinciding with monetary policy decisions and payments to IMF,” it said.
The SBP, however, feels that even with scheduled repayments to the IFIs, the SBP’s foreign exchange reserves would be adequate to meet all foreign exchange obligations.
The central bank also takes comfort from easing global commodity prices and strong home remittances that, it says, would offset pressure on the country’s current account in FY13’s remaining months.
“Soft commodity prices and strong remittances, should keep the current account contained within one percent of the GDP deficit,” the SBP projected.
Having sent back home $ 7.1 billion during 1HFY13, the overseas Pakistanis are expected to remit over $ 14 billion by the end of this year.
Domestically, the bank was happy to note that demand for private loans had increased with the formerly risk-averse banks lending Rs 146.5 billion more to private businesses compared to last year’s Rs 86.1 billion.
This trend, the central bank said, was helping large-scale manufacturing that could counter the weather-driven losses in the agricultural sector.
Except sugarcane, almost all cash crops including cotton, rice and wheat remained below target. Wheat under performed despite increase in support price in November 2012.
The manufacturing sector was likely to continue improvement with allied sub-sectors showing consistent growth since FY12.
On inflation, the SBP still feels that the average inflation rate for FY13 would remain within the fiscal target.
The central bank said the resilience of the informal sector was pushing the formal economy forward. “There are indications of foreign interest in joint-projects in the country’s real estate sector,” it said.