Terming revival of economic activity during the just-concluded FY14 as a “key development”, the central bank Thursday warned the loan-crazy federal government that total external and internal public debt of the country has crossed the limit of 60 per cent of the gross domestic product (GDP).
Also, the State Bank observed that despite efforts for fiscal consolidation on expenditure side, the Federal Board of Revenue (FBR) was still operating on a narrow tax base with tax mobilization still remaining lacklustre.
“Although the resumption of external inflows was important for a resource-constrained economy, this would add to the country’s external indebtedness,” said the central bank in its third quarterly report on the state of economy.
The report said external financing in Pakistan had increased subsequently with the issuance of Eurobonds, fresh loans from IFIs, and bilateral assistance.
On the financing side, it said, the government mainly had relied on domestic sources during Jul-Mar FY14.
“Total public debt (external plus domestic) has already crossed the limit of 60 percent of GDP, as set by the Fiscal Responsibility and Debt Limitation Act (2005) for FY13 onward,” it warned.
Hence, it said, any addition to the external debt should at least be matched with an equivalent reduction in the domestic debt outstanding. The report pointed out that despite efforts for fiscal consolidation on the expenditure side, tax mobilization still remains lacklustre.
“While the FBR should take concrete steps to plug tax leakages and increase documentation of all financial transactions, the provincial governments (having constitutional right to tax services and agricultural income) also need to implement provincial taxes more effectively,” it said.
Pressure in balance of payments also eased as bulky re-payments to the IMF subsided after November 2013, and the country experienced influx of external grants, loans and foreign investment, like Eurobonds.
While acknowledging this improvement, the report emphasized the need to address structural problems that continue to plague the economy. The policymakers should formulate an industrial policy that prioritizes production efficiency and job creation.
Such an initiative should focus on efforts to promote competitiveness, instead of a culture that creates and rewards inefficiencies; restructure loss-making PSEs (especially Gencos and Discos in the power sector; and PIA and Railways in transportation sector) to make them more dynamic and profitable; and create a skilled labor force that meets the current (and potential) needs of the manufacturing sector.
About the GDP growth, it said the real 4.1 percent growth was highest in the past five years.
“The economy appears to have turned a corner during the third quarter,” the report said. The SBP’s report said after many years of low growth, sentiments about the economy seemed to have improved. Manifestations can be seen in the rebound in real GDP growth; the rise in private sector credit; a contained fiscal deficit; the subdued inflation outlook; the sharp increase in dollar reserves and the appreciation and subsequent stability in the exchange rate.
The report mentioned that improvements in the economy were the result of the government’s resolve to address the energy shortage, a growing perception of business-friendly policies, and external inflows that have recently been realized.
More specifically, the auction of 3G/4G licenses; a larger than projected inflow via Eurobonds; program loans from the IFIs; and SBP’s efforts to support the foreign exchange reserves, have sharply improved the outlook of the country’s external sector, and to some extent, its fiscal position.
However, the report emphasized that “these signs of improvements should not discount the challenges faced by the economy. “Efforts for much-needed structural reforms should continue,” it said.
These positives developments provided a strong platform to move towards sustained economic growth in the medium term, it added.
The recent influx of external resources not only stabilized the exchange rate, but also sharply increased SBP’s dollar reserves.
“As of 30th May (2014) the SBP’s reserves were US$ 8.7 billion, compared to only US$ 3.5 billion as of end-December 2013,” it said.
Adding that while the rupee’s appreciation improved business sentiments and its subsequent stability had eased inflationary expectations, the sharp increase in the country’s foreign exchange reserves provided some comfort for domestic and foreign investment.
The report said that average inflation during Jul-Mar FY14 was 8.6 percent. Going forward, the stability of rupee, stable international oil prices and softer global commodity prices should further contain inflationary expectations.
On the basis of data released by the Ministry of Finance, the report said that fiscal deficit during the first nine months of FY14 was only 3.2 percent of the GDP. This, it said, was significantly lower than the average deficit in the last five years.
