An Anatomy of the recent state bank quarterly report


Not entirely good news

The main products responsible for growth slowdown were the jute, leather, petroleum products and cigarettes. The growth in the Large Scale Manufacturing also confirms the trend of a rapidly urbanising and modernising Pakistan



Critics say that although the economy is growing but it is still on shaky grounds and any jerk can bring it tumbling down. That is what the latest State Bank latest quarterly report also shows which was released recently. Here is its anatomy:

  1. Real sector:

In the real sector, agriculture rebounded well but cotton production was still short of the 4.1 million bales. The target was set to produce 14.1 million bales but only 10.5 million bales were produced. According to the report, the area under cultivation saw a decrease of 20pc over the last year. This should present a big concern for the government as without the basic ingredient of cotton, the whole supply chain of textiles would be affected. The government has recently announced a new export policy for the exporters to revamp production as well but if the basic supply chain is affected, none of the strategies would work. The government should incentivise farmers for increasing both the production area and the production volume of cotton/hectare. The rice crop production also fell and there was a negative growth of 3.3pc all over Pakistan for the rice production. This is understandable as there was a sharp downfall in the rice export quantum due to which farmers were discouraged from producing rice. However, it was compensated by increase in sugar cane and maize production which accounts for the increase in agricultural production. Notably, there is an interesting change going on in the agricultural economy of our country. According to the report, sowing of the Important Kharif crops dropped by 356,000 hectare in the past two years and 65pc of the area loss under cotton and rice goes unaccounted for. The report says that a part of this area has gone to vegetables and pulses. Now this represents an interesting change in our agricultural economy. Because of the rapid urbanisation, mushroom growth of small restaurants, fast food bars in small towns, there has been a sharp rise in the demand of vegetables and some vegetables now give even better margins than the traditional crops so people are shifting from crops to growing vegetables which was traditionally considered a relatively less respectable job. Secondly, people are now applying new techniques e.g. green house farming, mainly for vegetables to fulfill their off season demand. All these demand pattern shifts and restructuring of our economy is altering even the basic supply chain. On the other hand, despite all the shout outs about the growth, LSM (Large Scale Manufacturing) only grew by 2.2 percent against a growth rate of 3.9 percent for the same fiscal period in the last year. The main products responsible for growth slowdown were the jute, leather, petroleum products and cigarettes. The growth in the Large Scale Manufacturing also confirms the trend of a rapidly urbanising and modernising Pakistan. First, the highest growth in the LSM was in the drinks sector which registered a double digit growth in both fiscal years of 2016 and 2017. This represents propensity to modernise by the average Pakistani. It will also have ripple effects on other industries such as advertising which is already witnessing a growth of 10–12 percent per annum. Second is the continued increase in cement demand which indicates a strong rural urban migration trend and the desire of the rural or small town population to shift in the cities. Shifting to cities means that you will have to adapt the urban life style which further accelerates modernisation and domestic consumption.

The report stresses the grave situation of exports by stating that this is the year on year 10th consecutive quarter for falling exports and they plummeted a further 5.1pc in this quarter

  1. Fiscal deficit and exports:

The chapter on the fiscal deficit again exposes the weak structural foundation of the Pakistan’s economy. It stated that the fiscal deficit was 1.3 percent of the GDP in the fiscal year quarter-one, which is the highest quarterly deficit since 2012. And the reason for this high fiscal deficit is the absence of Coalition Support Funds which Pakistan has been receiving in exchange for its support against the war on terror in Afghanistan. The non-tax revenue for the first quarter of this year has decreased by as much as 42pc. Secondly the dividend income from Public Sector Enterprises has also decreased to up to 70pc which is indeed a huge drop. The sudden rise of fiscal deficit due to absence of CSF indicates the short sightedness of our ruling elite who have a parasitic approach towards running the country and are always looking for some external help instead of building the capacity to generate more revenues. With such an approach, they always seek external help in the form of loans or in the form of assistance and in the process entangle the country in the spiral of more and more loans. The total public debt increased by 866.1 billion reaching Rs20.5 trillion. The government tries to justify it by claiming that most of this increase was due to domestic debt. But they try to distort the actual reality as in the next chapter the report says that most of FDI from CPEC related projects for this quarter has been disbursed in the form of long term loans which is again a form of debt which you have to pay back even if you are writing it in books as FDI. From the total financial inflow of USD$1.1 billion from China in the first quarter of 2017, $USD700 million was a CPEC related loan. The government should clear the ambiguity surrounding the much hyped CPEC investment and important questions should be clearly answered as how much of the amount will be given in the form of a loan, what are the conditions of loan, on what projects will this loan be spent, how much will be the real FDI and what percentage of it will be spent by the Chinese companies themselves, what percentage would be disbursed to Pakistani government, etc. The government should make CPEC a national consensus instead of a point of conflict by making it more ambiguous.

The report stresses the grave situation of exports by stating that this is the year on year 10th consecutive quarter for falling exports and they plummeted a further 5.1pc in this quarter. In the words of the report’s author: “Pakistan’s export performance is not likely to improve unless our exporters improve their competitiveness, adopt innovative production methods, and diversify their products and markets”. The missing point here is the role of government which it should play in boosting exports. How can the exporters improve their competitiveness if the government will not provide cheap electricity to them? Similarly, for innovative production methods, you need to train exporters, educate them in new techniques and help them in finding new markets. The most important thing is to diversify the product base and to make a shift towards high value added and hi tech items. For that purpose, the government needs to form industry academia linkages, build joint ventures between local and international universities and make laws for foreign investors to source a percentage of their inputs from Pakistan or transfer their technology after a certain time period. The government should ask itself that is it fulfilling its responsibility before putting all the blame on exporters.

To sum up, although Pakistan’s economy is growing we still need to address its structural deficiencies. Among them, the most important ones are to broaden our tax base, reduce our fiscal deficit, diversify our FDI inflows other than China as well, use loans only for productive purposes, supply cheap inputs to the industry and impose an emergency plan for boosting exports. And, in the mayhem of these things we should not forget to focus on education and health, which form the back bone of a modern knowledge based economy.