At odds with common perception

It is evident that factors that led SBP to project lower growth rates in 2010, not only persist but have worsened.

In its annual report for 2010-11, published rather late, perhaps due to the gubernatorial change, the State Bank presents an outlook for 2011-12 which is at odds with common perception as well as the realities of the first five months of the year. The perception is that the economy is in dire straits as the year has already witnessed some seriously destabilising events, with electioneering before the announcement of elections expected to take its own toll. The State Bank seems to think otherwise.

For 2010-11, the official GDP growth target was 4.5 per cent but the State Bank had projected it to be 2-3 per cent. It now notes with satisfaction that the economy managed a growth rate of 2.4 per cent — midpoint of its projection — despite devastating floods. Credit for is being given to the bumper wheat crop and effective flood management with the warning that this need not ‘mask structural deficiencies’ of taxation, consequent reliance on domestic debt at the cost of the private sector, the widening energy deficit and the external imbalance. True enough. But the same logic was not applied to the outlook projected for 2011-12. A pessimistic government had fixed the GDP growth target at 4.2 per cent. The State Bank expects it to be in the range of 3-4 per cent — almost approaching the target.

There were heavy floods again this year. Once again, the bank feels comfortable about flood management. Some discomfort is expressed about the wheat crop, affected by shortages of fertiliser and a smaller area sown. However, all of the structural deficiencies have intensified. The fiscal deficit is again, likely to be above six per cent against the continually elusive target of four per cent. There has been some monetary easing but indications are there to suggest that the private sector will continue to lose out to the government in the credit market. Last year, the bank had projected a current account deficit of 3-4 per cent that actually turned out to be a surplus of 0.1 per cent. This year, a deficit of 1.5-2.5 per cent is expected by the State Bank. The energy deficit is also likely to be larger than last year’s.

It is evident that nearly all the factors that led the bank to project a lower growth rate last year, not only persist but, have worsened. There is additional uncertainty resulting from the memogate, the disturbance of the entente with the United States and the rising political temperature within the country. Regardless, the State Bank expects the overall growth target to be more or less achieved. Large-scale manufacturing does not figure in the picture. In September this year, the latest month for which data is available, there was a negative growth of 3.44 per cent over the previous month. The gains of a base change in this sector are now wearing down. Again, the small-scale manufacturing sector growth, a number repeated until the next survey, will be overstated to the extent that it ignores the devastating impact of the energy shortage. Adverse pointers are becoming visible on the export front also. In November, there was a year-on-year decline of as much as 10 per cent. Imports, on the other hand, rose sharply by 19 per cent. A double-digit decline in exports reflects a stagnating industrial sector.

Everyone except the State Bank believes that the management of floods was as bad this year as it was last year, if not worse. Its projection of a GDP growth of 3-4 per cent is no less tainted.

Published in The Express Tribune, December 23^rd, 2011.