The first quarterly report for financial year 2011 (FY11) on the economy issued by the SBP on Wednesday highlighted that the rise in total stock of domestic debt and liabilities came entirely from the government’s domestic debt.
Despite retirement of debt by public sector enterprises and through the sale of commodities; the total stock of domestic debt and liabilities increased by 6.7 per cent by end-November as compared to June 2010.
Excessive borrowing by the government from listed banks also limited the ability of private sector to raise funds. The nominal five per cent year-on-year growth in net credit extended to the private sector appears somewhat encouraging at first look. However, given that the entire increase was for working capital and that input costs have increased for many industries in real terms, the private sector credit off-take has probably contracted, warned the SBP.
The apex regulator highlighted that increasing non-performing loans and high-risk adjusted returns on government paper are crowding out more productive private sector activities.
Heavy borrowing by the government from local banks also negatively impacted the health of these institutions. “The growing exposure of banks to government-related lending has already led to a downgrading of some standalone bank financial strength rating (BFSR) of five Pakistani major banks by Moody’s,” cited the central bank.
“Pakistan’s experience in recent years suggests that government interventions lead to market distortions,” observed the SBP, citing that subsidies for wheat in FY08 were pocketed by smugglers at the expense of farmers and consumers while local crops were illegally moved to neighbouring countries. “Markets should be allowed to work, although there is a need for strong anti-trust regulation,” summed up the report.
Not just RGST
The central bank observed that a variety of opinions have been offered on tax reforms, including the much-maligned reformed general sales tax (RGST), wealth tax, extending the income tax net to agri-incomes, capital gains tax and improved tax governance. However, the SBP urged the government to move past deliberations over alternatives, asserting that “all of these proposals should be implemented to ensure widening of the tax base.”
The report contended that the implementation of RGST will not help the government raise its revenues in the short run, instead it will bear fruit over the long run by incentivising economic agents to document their transactions.
The SBP said that the government must take steps besides the implementation of RGST to raise revenues and broaden the tax net.
The report also said that by diverting development expenditures, the government has created some fiscal space and that this window of opportunity must be capitalised on to introduce structural adjustments to revenue collection and government expenditures.
Remittances shore up external accounts
Sustained inflows of worker remittances and private and official grants for flood relief helped narrow the current account deficit by 72.3 per cent during Jul-Nov FY11 compared to the same period last year. But the financial account surplus declined sharply to $0.5 billion from $2.2 billion during the same period last year.
“A large part of this decline was the result of a sharp fall in other investments despite the emergency loan of $453 million for flood relief given by the International Monetary Fund,” said the SBP.
Increased import quantum of food and textile items widened the trade deficit by $938.2 million during Jul-Nov FY11 in contrast to a contraction of $3,220.3 million during the same period last year. The report also pointed out that recently announced trade concessions for Pakistani exports to the European Union will improve their competitiveness.
Published in The Express Tribune, February 3rd, 2011.
COMMENTS
Comments are moderated and generally will be posted if they are on-topic and not abusive.
For more information, please see our Comments FAQ