A lacklustre report

State Bank’s first quarterly report for the current fiscal released on 17th February, 2015 contains an ordinary assessment of the economy and is largely devoid of the incisive analysis our central bank is famous for. There has been a marked improvement in the economy during the second quarter of FY15, which the State Bank surely is likely to persist throughout the year. Global oil prices have slumped to a five-year low, which would help contain trade deficit, inflation dropped to the lowest level in 13 years, the IMF is now satisfied with the progress on economic reforms paving the way for further disbursements, government had successfully issued Sukuks in the international market and the country is likely to get additional funding from the World Bank, ADB and through Coalition Support Fund (CSF).

While discussing the outlook of the economy, the report maintains that “Pakistan’s external sector would benefit most from the decline in oil prices, as petroleum directly makes up nearly 35 percent of our import bill.” Positive outlook on the external sector and low inflation in the second quarter provided room to the SBP to cut the policy rate by 50 basis points in November and reduce it further by 100 basis points to a multi-year low of 8.5 percent in January, 2015. However, it might be challenging to achieve the fiscal consolidation target of 0.6 percentage points in FY15. Revenue mobilisation by FBR so far is much less than the target and a significant decline in oil prices may reduce government revenues from this source while interest payments on the expenditure side will remain strong. Important reforms are needed to reduce the structural component of the fiscal deficit. The government had formulated a mid-term strategy to implement fiscal reforms, ranging from improving revenue generation to promoting private sector participation in loss-making PSEs. Plans are under way to restructure Pakistan Railways, Gencos and Discos so that these could contribute positively to economic development. These plans, however, “should be fast-track, with a specific focus on their managerial and operational inefficiencies and their spillovers on the fiscal sector and the rest of the economy.”

Even a cursory look at the report was enough to indicate that the SBP has generally confined itself this time to the narration of developments in various sectors of the economy during July-September, 2014 and concoction of a positive picture of the economy without highlighting its inherent weaknesses and showing the way forward. Clearly, the economy of Pakistan was faced with a number of challenges in Q1-FY15 including the delay in the release of fourth tranche of Extended Fund Facility (EFF) leading to uncertainty in the FX market and a significant depreciation of the Pak rupee in addition to the damage to agriculture caused by floods and the negative impact of the political events in Islamabad. As a consequence of these adverse developments, it was natural for the economy to suffer losses in terms of growth, fiscal and current accounts etc. The situation during the first quarter of FY15, of course, compared unfavourably with the encouraging signs witnessed in the second half of 2013-14. However, while nobody could argue with these observations as these are now a matter of record, one is somewhat puzzled to realize that the State Bank has omitted to highlight the fact that improvement in external sector during the rest of the year was not only projected due to a drop in international prices of oil but also due to loans from all kinds of sources including from the IMF, through Sukuk, funding from the ADB, the World Bank, etc, and grants from a friendly country and through the CSF. All these sources of financing the balance of payment (BoP) deficit were either transitory or extremely costly in terms of interest payments. In addition, the instalments due for repayment on account of IMF loan, earlier Paris Club rescheduling and foreign bonds in the near future would add a lot of pressure on the external sector. The worrying aspect is that exports are not rising fast while imports are still going up. How strange, however, it is that Finance Minister continues to be adamant to keep the rupee rate overvalued. The quarterly report should have pointed out the basic weaknesses in the external sector and highlighted its vulnerability in the not too distant future but the SBP has preferred to paint a rosy scenario. Also, it is well known that fiscal situation of the country is not satisfactory and the fiscal deficit target of 4.9 percent of GDP is almost impossible to achieve due to FBR’s failure to achieve revenue target, and rising expenditures. The Finance Minister is reported to have asked the IMF during the latest discussions in Dubai to show some flexibility insofar as fiscal target is concerned. The recent resistance in the parliament by the opposition parties to certain fiscal measures announced by the government in January, 2015 shows that the implementation of fresh measures is not an easy nut to crack while there is no escape from rising expenditures to curb militancy in the country. In this scenario, it was not enough for the SBP to suggest fast-tracking of reform measures. Such a bland and off-repeated statement would certainly not be enough to motivate the government to improve public finances or successfully persuade the opposition parties to soften their resistance to the necessary measures. The SBP, in our view, should have been more forthcoming and suggested some practical steps to get out of the quagmire.

A lack of emphasis on basic issues of the economy and the mention of the need to undertake necessary harsh measures in order to revive economy on a sustainable basis have not only showed a somewhat exaggerated position of the economy but would give an added excuse to parliamentarians to delay the much-needed reforms and criticise the IMF and other multilateral institutions for their unhelpful attitude. As demonstrated by past experience, the SBP also needs to put less faith in the government’s plans to adhere to a proper strategy of fiscal restructuring and reorganising of PSEs, which could improve the overall economy. The State Bank could also take certain in-house measures to increase the flow of credit to the private sector for investment purposes. As of now, banks are still investing heavily in PIBs, lending only to blue-chip customers and financing import payments while there is no growth in working capital and fixed investment loans. Lastly, the release of the report after lapse of such a time makes it largely outdated and hardly relevant for policymaking purposes. It would be fit to issue it as early as possible in order to enhance its utility. Parliamentarians for whose perusual the Report is legally required to be released, have hardly any patience to go through the old material.