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Highlights of SBP's 2003 Annual report

KARACHI (November 04 2003): As the State Bank of Pakistan sees it, the biggest challenge facing the economic managers in the short term is to create as many jobs as possible. Therefore, policy focus should shift to: (a) expenditures to improve infrastructure; (b) supportive fiscal and monetary policy; and (c) institutional capacity and bureaucratic hassles forced on private entrepreneurs.

In its Annual Report for 2002-2003, issued on Monday, SBP says, “Despite the impressive improvement in the macroeconomic fundamentals, a strong and secure external sector, increased development spending by the government, upsurge in growth rate, easy monetary policy and quantum jump in private sector credit, the popular perception about the economy amongst the media and commentators does not reflect the improvements.

It is true that the incidence of poverty in the country has risen from almost 20 percent to 33 percent, but this has happened over last 15 years and is not a result of the policies pursued in the last four years.

The reversal of this trend cannot take place until economic growth is put back on the trajectory of a sustained rate of 6 percent over the next 5 years and pro-poor policy interventions are faithfully implemented; the current rate of growth can only arrest a further rise in the poverty incidence.

“It is therefore important for the country to have realistic expectations rather than to hang on to false pretensions or indulge in financial speculations. Given the carryover of the past legacy, current geopolitical and security situation, non-supportive external economic environment, and weak institutional capacity, it will simply be a pipedream to expect an accelerated fall in the incidence of poverty in Pakistan in the short term.”

The report argues that “a large population is Pakistan's biggest economic resource, but it will be a source of strength only if properly developed through extensive investment in education and health. An analysis of various socio-economic dimensions of poverty suggests that Pakistan's performance has been dismal during the 1990s. Not only the income poverty but also the income inequality increased during the period.

While recovery in GDP growth rate in FY03 on the back of robust performance of agricultural, manufacturing and services sectors predicts good prospect for poverty reduction, the increased fiscal space due to restructuring of external debt should be utilised for increasing the pro-poor budgetary expenditure to reverse the rising trends in poverty and inequality among the households.

Poverty will not be eradicated unless the root causes of poverty, such as deprivation in human capital, are addressed adequately.”

Suggesting a way out, the central bank says that “it is quite unfair to look only to the government for the investment needs of the country. Given the substantial improvement in governance, policy stability and correction of macroeconomic imbalances, the continued weak (albeit improving) private investment growth is still a matter of concern.

It must be noted that even the hoped-for improvement in foreign investment is unlikely to emerge unless encouraged by a robust increase in domestic private investment. The most promising sectors for job creation by private sector are construction and housing, small and medium enterprises, and rural development (both in agriculture and non-agricultural activities)”.

The report says: “Another key pillar of the FY03 performance with significant positive, direct and indirect ramifications for the broader economy, were the external sector surpluses, which moved from strength to strength.

Firstly, the current account surplus was substantially higher than in FY02. Moreover this improvement was supported by a small capital account surplus (the relatively lower FY02 current surplus had been further undermined by a large capital account deficit).”

Last year, “inflationary pressures were further subdued during FY03 mainly due to (1) stable food prices, and (2) imported deflation (due to both appreciating rupee and lower international commodity prices).

Interestingly, despite the apparent weakness in firms' pricing ability, corporate profitability appears to have improved in FY03, probably reflecting the rise in aggregate demand (rising sales volumes), as well as lower interest rates and stronger rupee (both positively affecting margins).”

Another very positive development during FY03, according to SBP, was the substantial increase in tax revenues, which rose by 16.2 percent, in contrast to the 8.3 percent increase in FY02.

This is impressive given the fall in the tariff rate, the appreciation of the rupee (which lowers the base for ad-valorem taxes) and low inflation (resulting in loss of seigniorage revenues).

The rise in the GST receipts, in particular, suggests a welcome increase in domestic demand as well as a broadening of tax base.

This improvement in revenues, coupled with disciplined spending, saw the fiscal deficit fall to 4.4 percent of GDP – the first time it has fallen below 5 percent of GDP in over 25 years.

In fact, the only blemish in the FY03 fiscal performance is the surprising (and unfortunate) shortfall in development expenditures, despite the available fiscal space.”

About savings and investment, the SBP says: “National savings rose sharply to reach a respectable 18.5 percent of GNP in FY03 as compared to 16.8 percent in FY02.

This improvement is mainly on the back of a substantial rise in net factor income from abroad due to a sharp acceleration in workers' remittances. However, domestic savings decelerated falling from 16.7 percent of GDP in FY02 to 15.5 percent in FY03.”

“Total investment grew by 16.2 percent during FY03, showing the strongest rise during the last 6 years, this was in sharp contrast to the anemic 0.4 percent growth in FY02.

Consequently, the ratio of total investments to GNP rose to 14.8 percent in FY03 from 14.6 percent in FY02. Encouragingly, most of the rise in the investment during the year came from private sector investment, which grew by a healthy 14.4 percent during FY03 compared to 6.2 percent in the preceding year.”

SBP, however, cautions that, “notwithstanding the satisfactory fiscal performance witnessed in FY03, it is important to note that Pakistan still remains heavily burdened by the debt incurred in the past period, and needs to generate sustained primary fiscal surpluses for years to come.

Moreover, it is imperative that the requisite fiscal prudence be evident in current rather than development spending (which needs to accelerate) if the economy's ability to carry debt is to improve.”

The report explains that “in fact, the growth in Pakistan's overall debt stock has slowed significantly in recent years, driven primarily by the government's improved fiscal position, pre-payments of expensive debt and the strengthening domestic currency.

This was also evident in FY03, which saw the stock of public debt rise by only 1.0 percent (Rs 38.7 billion) by end-June 2003, pushing down the debt to GDP ratio from 104.3 percent in FY02 to 95.1 percent in FY03.”

“Moreover, the rise in the debt stock emanates entirely from a sharp 7.8 percent increase in domestic debt, as the rupee value of the country's external debt and explicit liabilities declined for the second successive year.

In turn, all of the increase in domestic debt during FY03 stemmed entirely from long-term debt.

The latter, in particular, is certainly very commendable, given that domestic interest rates were at historical lows, but the large share of relatively expensive borrowings through the NSS is a little disappointing,” the report concludes.

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