The State Bank of Pakistan (SBP) submitted its First Quarterly Report of 2015-16 titled ‘The State of Pakistan’s Economy’ to the Parliament on Monday. According to the report, notable improvements can be observed in key macroeconomic indicators during the first quarter of the year; however, much needs to be done to ensure their sustainability.
“Taking comfort from visible improvement in macroeconomic environment, SBP initiated monetary easing in 2014-15, which continued during the first quarter of 2015-16,” the report said. “This policy stance was augmented by a pro-growth budget for 2015-16. In addition, marked improvement in security conditions, relatively better energy management, and persistently low global commodity prices, have positioned the economy to further improve on its performance going forward,” the report added.
According to the SBP report, some improvements were already visible from the changes in key macroeconomic indicators during the first quarter of the year. Economic activity seems to be gearing up as large scale manufacturing recorded a noticeable increase over the last year. Further, the current account deficit narrowed, which was comfortably financed by higher financial inflows; the country’s FX reserves recorded all time high levels, and were sufficient to finance import bill of seven months; fiscal deficit was reduced, along with a shift in its financing away from SBP; and inflation remained on low trajectory.
In the report, SBP mentions that while these positive developments are welcome, much needs to be done to ensure their sustainability. Following are some points of concern:
Although budget deficit for Q1-FY16 was lower than the same period last year, tax collection could not post the required growth. In order to keep the fiscal deficit within target without compromising on development spending, tax efforts have to be increased manifold, particularly by widening the tax base and effective enforcement. With the recent tax measures, FBR taxes have shown a significant YoY growth of 16.8 per cent in Jul-Nov FY16.
Loss making public sector enterprises (PSEs) remained a contingent liability on scarce fiscal resources. The privatisation process of such PSEs is still in initial stages. This must be expedited to improve quality of services, and stem losses to the exchequer.
Dwindling exports continued to eclipse the overall healthy performance of the external sector. Specifically, exports recorded a year-on-year decline for the 3rd quarter in a row.
In addition to exports, FDI also needs to contribute more towards external sector sustainability. While it is encouraging that FDI from China is likely to increase due to progress on various infrastructure projects under the CPEC, the country also requires foreign investment in exportable sectors.
Extreme weather conditions in recent years have increased vulnerability of Pakistan’s agricultural sector. In FY16 also, Kharif crops (cotton and rice) have suffered from heavy rainfall.
Finally, the report adds, it is encouraging that 9th review of the IMF programme has been completed successfully and several important reforms have been introduced, like independent statutory Monetary Policy Committee, Credit Bureaus Act, etc. However, the slow progress on privatisation process and persistent distribution and transmission losses in the power sector remain a challenge.
