Economic legacy and prospects
Legacy, in terms of SBP’s report, is not as dismal as it appears in official pontifications. nor prospects any better.
pervez.tahir@tribune.com.pk
Delayed, much delayed for inexplicable reasons, the State Bank of Pakistan (SBP) annual report for 2012-13 has come out at an interesting time. Fiscal Year 2012-13 was the last year of the PPP government and 2013-14 is the first year of the PML-N government. The delay gave the quasi-autonomous SBP enough time not only to assess the performance in the outgoing year, but also the prospects for the current year.
The PPP left an inflation rate of 7.4 per cent against 11 per cent in the previous year. Better world prices, reduced domestic energy prices and a stable exchange rate are cited as reasons. Industrial growth nearly achieved its target. Growth in manufacturing was 4.4 per cent, which according to the report, was the highest in the past five years. This revival was broad-based, contributed by many industries. Exports improved and the current account deficit came down from 2.4 to one per cent. The PPP’s Achilles’ heel was the fiscal deficit. A target of 4.7 per cent was set, but the year ended with eight per cent.
Failure to realise targeted tax collection and a discretionary spending spree are given as the factors behind it. Most important, says the report: “For the third consecutive year, the authorities had to bail out the energy sector by paying off the circular debt, which pushed the fiscal deficits way above the respective targets for these years.” The first instalment of Rs322.2 billion of circular debt was paid by the PML-N government in June, adding to the fiscal deficit attributed to the PPP government. This deficit had to be financed entirely through domestic sources — Rs939.6 billion from commercial banks and Rs506.9 billion from the SBP. As a result, domestic debt increased by 24.6 per cent. Due to heavy IMF instalments and negligible external inflows, foreign exchange reserves were down to a “55-month low of $6 billion”.
How is the PML-N doing in terms of the same indicators? Double-digit inflation, according to the report, is likely to return in the range of 10.5-11.5 per cent. The reasons include increased energy prices, a weaker rupee, higher GST and dwindling wheat stocks. The “developments in the first quarter of FY14 do not bode well for inflationary expectations”. Despite increased energy supply due to the payments for circular debt, GDP growth is unlikely to be five per cent, as claimed by the finance minister. It is forecast in the range of three to four per cent.
The recovery of manufacturing growth in the last year is expected to continue. Such recovery is not envisaged on the tax side. Fiscal deficit is expected to overshoot the already high target of 6.3 per cent. The positive effect of lower power subsidies may be neutralised by the failure of three larger provinces to generate surpluses in their budgets. Expenditure will also increase on account of Rs277.5 billion due as interest on short-term domestic debt incurred by the previous government. On the external front, the SBP is more optimistic than the IMF. The optimism is based on a wish list: the success of the privatisation programme, sale of 3G licences and the realisation of the dues from Etisalaat. It is also hoped that the structural reform agreed with the IMF will improve the climate for foreign investment. Coalition Support Funds are expected to be larger than envisaged in the budget.
The legacy, in terms of the SBP’s factual report, is not as dismal as it appears in official pontifications. Nor the prospects are any better, despite the concessional marks given to the government.
Published in The Express Tribune, January 17th, 2014.
The PPP left an inflation rate of 7.4 per cent against 11 per cent in the previous year. Better world prices, reduced domestic energy prices and a stable exchange rate are cited as reasons. Industrial growth nearly achieved its target. Growth in manufacturing was 4.4 per cent, which according to the report, was the highest in the past five years. This revival was broad-based, contributed by many industries. Exports improved and the current account deficit came down from 2.4 to one per cent. The PPP’s Achilles’ heel was the fiscal deficit. A target of 4.7 per cent was set, but the year ended with eight per cent.
Failure to realise targeted tax collection and a discretionary spending spree are given as the factors behind it. Most important, says the report: “For the third consecutive year, the authorities had to bail out the energy sector by paying off the circular debt, which pushed the fiscal deficits way above the respective targets for these years.” The first instalment of Rs322.2 billion of circular debt was paid by the PML-N government in June, adding to the fiscal deficit attributed to the PPP government. This deficit had to be financed entirely through domestic sources — Rs939.6 billion from commercial banks and Rs506.9 billion from the SBP. As a result, domestic debt increased by 24.6 per cent. Due to heavy IMF instalments and negligible external inflows, foreign exchange reserves were down to a “55-month low of $6 billion”.
How is the PML-N doing in terms of the same indicators? Double-digit inflation, according to the report, is likely to return in the range of 10.5-11.5 per cent. The reasons include increased energy prices, a weaker rupee, higher GST and dwindling wheat stocks. The “developments in the first quarter of FY14 do not bode well for inflationary expectations”. Despite increased energy supply due to the payments for circular debt, GDP growth is unlikely to be five per cent, as claimed by the finance minister. It is forecast in the range of three to four per cent.
The recovery of manufacturing growth in the last year is expected to continue. Such recovery is not envisaged on the tax side. Fiscal deficit is expected to overshoot the already high target of 6.3 per cent. The positive effect of lower power subsidies may be neutralised by the failure of three larger provinces to generate surpluses in their budgets. Expenditure will also increase on account of Rs277.5 billion due as interest on short-term domestic debt incurred by the previous government. On the external front, the SBP is more optimistic than the IMF. The optimism is based on a wish list: the success of the privatisation programme, sale of 3G licences and the realisation of the dues from Etisalaat. It is also hoped that the structural reform agreed with the IMF will improve the climate for foreign investment. Coalition Support Funds are expected to be larger than envisaged in the budget.
The legacy, in terms of the SBP’s factual report, is not as dismal as it appears in official pontifications. Nor the prospects are any better, despite the concessional marks given to the government.
Published in The Express Tribune, January 17th, 2014.