Daily Times Editorial March 2, 2014

SBP Quarterly Report The State Bank of Pakistan’s (SBP’s) Quarterly Report for the first quarter of the current financial year indicates a mixed picture of the state of the economy. First the good news. GDP grew by five percent against the year’s target of 4.4 percent and almost double the comparable growth of 2.9 percent in the first quarter of the last fiscal year. Considering that the SBP’s forecast for the year’s growth was four percent, this is encouraging. Billions of dollars are expected during this fiscal from the IMF as part of its package of $ 6.7 billion, from outstanding payments from the Coalition Support Fund, 3G auction and workers’ remittances. The report also notes that more than $ 3.3 billion are expected in the second half of the current fiscal on account of the launch of a Euro bond, disinvestment (of state-owned enterprises) through the stock exchange, privatisation proceeds from Etisalat (stuck because of the reported failure to transfer PTCL properties to the company), etc. The IMF has endorsed the hopeful picture but continues to emphasise the need for tax, energy sector and other reforms to help the economy further. The better growth is due to a positive performance by the industrial and services sector but agriculture is likely to underperform because of below target cotton and sugarcane production. Pakistan’s struggle to hit improved growth figures is crucial, amongst other factors, to deal with the problem of employment for its youth bulge, estimated to account for over 65 percent of its population. The prime minister’s youth loans initiative is meant to address at least part of this ‘mountain’, but its results are still to roll in. However, despite the good performance in quarter one, the year’s forecasts for growth remain in the range of 3-4 percent according to the SBP and a more modest 2.8 percent according to the IMF. The SBP’s fiscal gap forecast for the year is 6-7 percent of GDP, to be measured against the first quarter’s 1.1 percent (1.2 percent for the comparable period last year). This result is owed to improvements on both the revenue and expenditure sides. Tax revenues have increased 19 percent in the first quarter as opposed to 10.3 percent for last year’s comparable period. Now some of the bad news. Inflation is up to 8.1 percent as compared to 5.6 percent for the first quarter of last fiscal. Although the government’s annual target for inflation this year is eight percent, the SBP forecasts it will rise to 10-11 percent, increasing the misery of the poor and even middle class citizens. Public debt rose an alarming Rs one trillion in the first quarter, largely due to adverse exchange rate movements against the dollar that increased the external debt stock but also because of government borrowing that remains a concern when the target of zero borrowing from the SBP for the quarter is kept in mind. Repayments on external debt caused a decline in foreign exchange reserves of $ 1.2 billion in the first quarter, which resulted in a decline of the rupee’s value against the dollar of six percent in the first quarter compared to 0.3 percent in last year’s first quarter. In addition, industrial revival caused import pressures once again, particularly for capital goods and raw materials, with petroleum products, machinery and metals imports heading the list. The trade deficit as a result of these developments increased for the first quarter by $ 0.6 billion over last year. It is both surprising and heartening that more than targeted growth has been achieved in the first quarter when the issue of shy investment, both foreign and domestic, and the flight of capital because of security and energy issues is taken into account. The positive turn reflects the residual confidence in the economy (at least amongst investors already engaged on the ground). To restate the obvious, unless the terrorism, law and order and energy issues are sorted out, the jury is out whether the first quarter’s good performance can be sustained, even meeting the relatively modest targets for growth, etc, that have been set by the government’s economic managers.