Daily Times editorial June 3, 2010

SBP third quarter report

The State Bank of Pakistan’s (SBP’s) report for the third quarter of FY10 paints a rather gloomy picture of the economy despite bright spots here and there. GDP growth is expected at 4.1 percent, up from the niggardly 1.2 percent last year, mainly owed to above-target growth of livestock, large scale manufacturing (LSM) and the services sector, and despite the below-target performance of agriculture because of water shortages and unfavourable weather conditions. Even the expectation that the switchover to minor crops over a large area would return strong growth figures was belied, most of the minor crops too suffering from a rainfall deficit during the winter. Although agricultural produce contributed significantly to exports, the domestic prices of even surplus harvest crops suffered a steep incline. After a modest recovery in the first half of FY10, LSM growth accelerated in the year’s third quarter. With consumer financing by commercial banks making a reappearance from the trough it had fallen into when the recession hit, demand for consumer durables, particularly automobiles, strengthened despite rising costs.
The overall external account picture would remain vulnerable according to the SBP, despite the sharp decline in the current account deficit from the earlier forecast of 3.2-3.8 percent of GDP and last year’s 5.7 percent to 2.2-2.8 in FY10. This is because external financing receipts plummeted despite improved exports and workers’ remittances.
The fiscal deficit seems poised to exceed earlier estimates and may come in at 5.1-5.6 percent of GDP, adding further impetus to the anticipated inflationary pressures from the second half of FY10. Consumer Price Index (CPI) inflation would exceed the estimates, arriving in the range of 11.5-12.5 percent. Needless to say, the core inflationary contribution of food items leads the list of factors producing such pressures. Despite the ballooning fiscal deficit, contributed to in no small measure by the diversion of funds to Pakistan’s own war on terror, the SBP reports that government borrowings from it have been less than in previous years. It is not clear whether the same applies to government borrowings from the commercial banks. And even if it does, that would suggest that the fiscal deficit has been financed by monetary means despite the continuing attempts by the SBP to keep monetary policy tight through the base rate and other measures. The SBP has identified the main factors behind pressures on fiscal accounts as increasing current expenditure and a low tax-to-GDP ratio. Whereas the war on terror expenditures, and their delayed reimbursement by the US because of audit concerns may be a heavy contributor to such increasing current expenditures (the defence budget for next fiscal is expected to go up by 31 percent), there is little doubt that the people in power show no signs of belt tightening to reflect the country’s economic and financial woes, flouting even the SBP’s advice in this regard. The princely style of the political class in power has by now become a permanent fact of life in the Islamic Republic, and one in deep dissonance with our straitened economic circumstances.
As far as our abysmal tax-to-GDP ratio is concerned, as long as large parts of the economy remain outside the tax net (e.g. the agricultural and informal sectors), squeezing more taxes out of the narrow base of direct taxpayers may turn out in the end to be a case of killing the goose that lays the golden eggs. Apart from widening the tax net to include all incomes irrespective of source, a tax paying culture, conspicuous by its absence at present, needs to be encouraged and developed. But to be effective, this effort would have to be accompanied by a real adherence by the political class in power to austerity in public and private life and an honest taxpayers’ profile in order to set an example for society at large. Asking for the moon?