- The report showed some disturbing trends
The State Bank of Pakistan (SBP) recently released its annual report ‘The State of Pakistan’s Economy 2018-19’ in which it primarily assessed the growth and macroeconomic situation of the country during FY19.
The opening chapter reviewed the overall economy, in which it pointed out that macroeconomic adjustments, primarily through a tight monetary stance and devaluation of the rupee, had allowed reining in current account deficit, although the gains of these two policy measures had moderate impacts on adequately checking inflation– primarily at the back of ‘partial reversal of tax reliefs and implemented PSDP cuts… [and also]… government continued to borrow heavily from SBP, which in turn somewhat diluted the impact of contractionary monetary policy’.
These stabilisation policies, both before and under the International Monetary Fund’s (IMF) Extended Fund Facility (EFF) programme signed in May 2019 with the government, led to a squeezing of aggregate demand, along with contraction in large-scale manufacturing.
At the same time, private sector credit growth also remained a lot weaker than the previous fiscal year, as the Report highlighted ‘the momentum in private credit weakened: private sector credit expanded by Rs693.5 billion during FY19, compared to Rs775.5 billion last year. Resultantly, the credit to GDP ratio remained stagnant at 17.3 per cent in FY19… [where]… the expansion in loans for fixed investment more than halved compared to FY18… [and]… in FY19, however, long-term loans grew only Rs82.9 billion – less than half of the Rs203.9 billion increase recorded in FY18’.
The lukewarm economic activity thus generated in this macroeconomic environment, resulted in growth in real GDP (gross domestic product) to be a lot lower at 3.3 per cent than the target of 6.2 per cent for FY19. Here, the Report indicated that all major economic sectors performed poorly, whereby a) agriculture growth– the mainstay sector of the economy– was a paltry 0.8 per cent (against a target of 3.8 per cent, and actual growth of 3.9 per cent in FY19), and b) growth rate of the industrial sector only grew by 1.4 per cent during FY19, while during the same time in FY18, it grew by 4.9 per cent.
Time for fiscal policy balancing with monetary policy, is indeed overdue, before God forbid, the recessionary trends in the economy turn into a depression. Also, the SBP should not shy away in calling a spade a spade when it comes to existence of a very weak negative relationship between policy rate and inflation, and between inflation and unemployment, as being demonstrated by data for some time now. Moreover, the SBP needs to understand, as a consequence, that economy is suffering from stagflation, and plan accordingly
This is indeed a heavy sacrifice ratio to entail for the real sector, given that CPI (consumer price index) inflation still increased the target at 7.3 per cent against a target of 6 per cent, even when ‘the SBP’s monetary policy committee (MPC) increased the policy rate in all six decisions during the year, by a cumulative 575 bps’. This begs the question as to why the SBP stuck with keeping the policy rate high, when inflation data showed little response to it during all this time, when it could have realised inflation was not just demand-pull but also cost-push.
While economic growth remained a casualty of this controversial consistent tight monetary stance– the most in Asia during this time– other related negative consequences of this policy stance, weakness on the tax policy and administration side, and the slowdown in economic growth on, firstly, tax revenue collection, which not only remained well below the target for FY19, but moreover ‘tax collection effort was also underscored by the fact that revenues could not even keep pace with nominal GDP growth during the year’.
Secondly, while the report did indicate that interest payments increased a lot, it remained short of linking it with the tight monetary policy stance, even when the real interest rate for many months remained well above the convention of 2 per cent. Hence, the (unjustified) high level of policy rate not only fed to fiscal deficit, which ballooned to 8.9 per cent of GDP (well above the target of 4.9 per cent of GDP), the external debt repayment component also enhanced by excessive devaluation of Rupee, leading in turn to overall gross domestic debt at a very high level of 84.8 per cent of GDP, and exceedingly higher than the target of 68 per cent of GDP.
Having said that, the SBP seemed to take virtually no responsibility for its part in the creation of this precarious growth and stability situation, and virtually pushed the entire buck of responsibility on fiscal sector weaknesses– for instance, ‘fundamental structural deficiencies in Pakistan’s taxation system’. Having said that, the Report did internalise the impact of stabilisation measures, along with moderation in the economy on banks’ non-performing loans (NPLs) ‘which increased sharply during FY19… [where]… on a yearly basis, gross NPLs posted a growth of 23.2 per cent during the year, which is the highest growth observed since FY11’.
Hence, clearly the business’s capacity to repay loans was dented– in addition to the impact of reduced aggregate demand and growth slowdown– due to contractionary macroeconomic policies, over-adjustment through expenditure cuts, lack of private-sector credit growth and needed institutional reforms– especially on the aggregate supply side. Perhaps the Report should have undertaken a special section to see the impact of high policy rate and exchange rate devaluation, in terms of sacrifice ratio in the shape of reduced growth (and with it lack of large-scale manufacturing, and employment generation), higher public debt repayments, extent of fiscal deficit, and NPLs.
Surely, fiscal policy remained weak, and institutional reforms proceeded at a very slow pace, yet the impact from the side of monetary/exchange rate policies also needed to be highlighted in the Report as choice was perhaps over-used. That admission would have given needed hope for business confidence. Time for fiscal policy balancing with monetary policy, is indeed overdue, before God forbid, the recessionary trends in the economy turn into a depression. Also, the SBP should not shy away in calling a spade a spade when it comes to existence of a very weak negative relationship between policy rate and inflation, and between inflation and unemployment, as being demonstrated by data for some time now. Moreover, the SBP needs to understand, as a consequence, that economy is suffering from stagflation, and plan accordingly.