The recently released First Quarterly Report of the State Bank of Pakistan (SBP) presents an analytical and objective assessment of the performance of the economy during July-September 2008 and recommends continuance of policies focused on macro-economic discipline and good governance.
According to the report the sense of crisis gripping Pakistan’s economy in the early months of FY 2008-09 has eased by November 2008, primarily on account of government policies designed to address the risks confronting it, and entry into a macro-economic stabilisation programme to support medium term reforms under the aegis of the IMF.
The risk of any immediate default on external obligations has also receded on account of the receipt of $3.0 billion by end November 2008, under the IMF programme, and this has significantly improved the foreign exchange reserve adequacy position of the country. Furthermore, pressure on the strength of Pakistan rupee has been somewhat moderated on account of growth in exports and this has also helped in containing inflationary pressures.
The report, however, quite appropriately warns that notwithstanding the relative positives, there is no room for complacency. The imbalances in our economy are still disturbingly large. These challenges are worrisome on account of the difficult international economic environment which poses problems for country’s external receipts (exports, remittances, FDI etc.) aside from limiting its ability to tap international capital markets.
The growth in domestic output (GDP) in FY09 according to the report will be in the range of 3.5 – 4.5 per cent against the target of 5.5 per cent and the achievement of 5.8 per cent in FY2007-08. Inflation (as measured by CPI) in the economy will be at a disturbingly high rate of 20-22 per cent as against the annual plan target of 11.0 per cent. It is, however, heartening to note that both fiscal and current external account deficits are estimated to improve in FY09. The fiscal deficit as a percentage of GDP is projected between 4.3 to 4.8 per cent against the target of 4.7 per cent and the actual of 7.4 per cent in FY2007-08.
The report has quite appropriately warned that global recession and risk averse behaviour of investors would seriously impact international trade and level of foreign exchange inflows in the economy. In the event of shortfall of external financing, the burden of financing the fiscal gap will disproportionately fall on commercial banks, as the government has committed to the IMF not to borrow incrementally from the State Bank of Pakistan.
Agricultural growth, according to the report, in the current fiscal year, would be significantly higher than in FY08, notwithstanding the fall in sugarcane harvest. This welcome improvement is attributable to a record rice harvest of 6.5 million tons, a small improvement in cotton production during kharif FY09, and the possibility of a large wheat harvest. Reasonable growth is also anticipated in minor crops and livestock sub-sectors. Important policy measures announced in FY09 budget to encourage farmers have played a significant role in the healthy performance of agriculture. These according to report include: (1) increase in the support price of wheat for FY09 crop, (2) a 25 per cent higher agri-credit target for FY09 compared to FY08, (3) increase in subsidy for DAP, (4) starting of crop insurance scheme and (5) exemption of GST on fertilisers and pesticides etc.
Large scale manufacturing, unfortunately registered a negative decline of 6.7 per cent in Q-I-FY09 as against a satisfactory growth of 7.3 per cent in Q-I FY08. Seven sub-sectors (having 72.4 per cent weight) out of fifteen registered decline. This unsatisfactory performance is attributable to a number of factors including energy shortages, deterioration in domestic law and order situation, impact of pass through of international oil prices, sharp fall in the external value of the rupee, slowdown in domestic demand and weakening of external demand.
Despite slowdown in economic activities in the country, the services sector showed satisfactory growth in QI-FY09. Community and social services, finance and insurance as well as public administration and defence are estimated to exhibit commendable growth in FY09, while wholesale and retail trade and transport and communications are likely to show a weak performance.
Inflationary pressures remained disturbingly strong in the first five months of FY09. The Consumer Price Index (CPI) and Sensitive Price Index (SPI)
witnessed uncomfortable increases during the period. Core inflation (non-food, non-energy) strengthened during the first five month of FY09 which reflects the persistence of uncomfortable inflationary pressures in the economy.
Money supply (M2) saw a YoY growth of 10.2 per cent by end November 2008 – the lowest witnessed in the last seven years. A strong contraction in net foreign assets (NFA) of the banking system more than offset a sharp rise in budgetary borrowings from the central bank and a continued strong demand for credit from the private and public sector enterprises.
In the fiscal sector, performance during Q-I – FY09, showed impressive improvement on account of the shift in policy. The overall fiscal deficit dropped to 1 per cent of annual GDP during this quarter, which is consistent with the annual fiscal target recommended in the IMF stabilisation programme. The significant improvement in the reduction of fiscal deficit is mainly attributable to sharp reduction in development expenditures.
Pakistan balance of payments remained under stress during July-November FY2008-09 on account of a sharp rise in current account deficit and decline in financial and capital in flows. This resulted in pushing down country’s foreign exchange reserves to a dangerously low level and bringing down the external value of our rupee by 16.3 per cent against the US dollar by end October FY08. Surplus in financial account also registered a 62.0 per cent fall during July-Nov. FY09, as compared with increases in the corresponding periods of last three years.
The deficit in current account in FY09 is projected at between 6.2 to 6.8 per cent of GDP as against the actual of 8.4 per cent in FY08.
Total liquid foreign exchange reserves at end-November 2008 amounted to $9.1 billion against $15.7 billion at end-November 2007.
Net foreign investment during July-November 2008 stood $1.4 billion as compared with $1.8 billion and $2.0 billion in the same periods of FY08 and FY07 respectively. Workers’ remittances in the current fiscal year (FY09) are projected at $7.5 billion as against $6.5 billion in FY08.
The message which emerges from a careful study of the report is that a focus on macro-economic discipline pays dividends for the economy and the continuation of fiscal discipline and economic reforms do not necessarily represent a trade off with economic growth.
The elected government should implement the next phase of reforms where development expenditures on poverty reduction, energy, education, health, irrigation, water sewerage and conservation can be enhanced without sacrificing fiscal discipline.
TABLE-1: SELECTED ECONOMIC INDICATORS
FY07 FY08 FY09
Growth rate (per cent)
LSM Jul-Sep 11.3 7.3 -6.2
Exports (fob) Jul-Nov 4.5 6.5 12.7
Imports (cif) Jul-Nov 10.3 18.4 16.5
Tax revenue (FBR) Jul-Nov 19.1 148 24.4
CPI (12 month MA) Nov 7.9 7.6 19.1
Private sector credit Jul-Nov 3.9 4.0 -0.2
Money supply (M2) Jul-Nov 3.9 4.0 -0.2
Billion US dollars
Total liquid reserves1 end-Nov 12.3 15.7 9.1
Home remittances Jul-Nov 2.1 2.6 3.0
Net foreign investment Jul-Nov 2.0 1.8 1.4
Per cent of GDP2
Fiscal deficit Jul-Sep 1.0 1.6 1.0
Trade deficit Jul-Nov 3.1 4.6 4.9
Current a/c deficit Jul-Nov 2.8 2.8 3.9
1 With SBP & commercial banks.
2 Based on full-year GDP in the determinator. For FY09 estimated full-year GDP has been used.
Source: State Bank of Pakistan
TABLE-2: PROJECTIONS OF MAJOR ECONOMIC INDICATORS
FY08 Annual plan targets Projections
Growth rates in per cent
GDP 5.8 5.5 3.5-4.5
Average CPI Inflation 12.0 11.0 20.0-22.0
Monetary assets (M2) 15.3 14.0 11.0-12.0
Billion US dollars
Workers’ remittances 6.5 7.7 7.5
Exports (fob-BoP data) 20.1 22.9 30.5 – 22.0
Imports (fob-BoP data) 35.4 37.2 33.5-35.0
Per cent of GDP
Fiscal deficit 7.4 4.7 4.3-4.8
Current account deficit 8.4 7.2 6.2-6.8
Note: Targets of fiscal and current account deficit to GDP ratios are based on Nominal GDP in the Budget document for FY09, while their projections are based on projected (higher) nominal GDP for the year. The News
Source: State Bank of Pakistan