In its last report, State Bank of Pakistan (SBP) claimed that due to rigid macroeconomic stabilization programme initiated in November 2008, the country achieved significant reduction in external imbalances, a drop in inflation, stability in the rupee-dollar parity, and easing of monetary position, which are all likely to support economic stability. Last year the government applied the tight macroeconomic stabilization programme, with the support of the International Monetary Fund's (IMF) stand-by arrangement (SBA), because of the growing macroeconomic disparities and fast diminishing of the foreign exchange reserves. But on the other hand, soaring fiscal imbalance, poor tax-to-GDP ratio and overspending of the government have increased the risks to macroeconomic stability and may make it hard to achieve the quarterly targets of IMF's SBA.
According to the report the risks to the economy are rising in the form of reduction in the overall volume of trade, lower than expected foreign assistance, poor tax-to GDP ratio, a rise in the fiscal imbalances and the fear of a surge in domestic prices due to conditional financial aid from the IMF. The increase in the prices of gas, electricity and POL verify this.
The report states that the federal government has accepted to boost the share of provinces in the federal divisible pool to 56.0 per cent in the first year of the National Finance Commission (NFC) award and to 57.5 per cent in the remaining years of the award. The other three provinces agreed to slash their percentage shares so as to increase the share of Baluchistan to 9.09 per cent.
The agriculture sector showed a below average performance in the initial months of FY10.As compared to January 2009, the performance of Kharif crops has been significantly weaker mainly because of water shortage at sowing times and, more significantly, farmers' disappointment with prices received in the last year's kharif season. The other obstacles include high temperatures, pest attacks and excessive use of fertilizers instead of BT cotton seeds.
The large scale manufacturing (LSM) sector grew by 0.7 per cent as compared with a decline of 5.0 per cent during July-Oct FY09. The reasons behind this were gradual easing of the monetary policy and fiscal support, as well as the impact of increase in farm incomes in FY09.
On account of recovery in finance and insurance sub-sectors, the service sector is expected to slightly surpass the FY09 growth. Workers' remittances showed a notable growth of 29.2 per cent during July-November FY10. According to SBP's projection, during FY10 workers' remittances would amount to $8.8 billion.
The report feared that inflation may exceed its target of 9 per cent due to the elimination of energy subsidies, rise in gas, electricity and petroleum product prices.
The budget deficit may be higher than the projected target. The continued violence in the country and resultant rehabilitation drive of thousands of internally displaced person (IDPs) from parts of FATA has poorly affected budgetary allocation of the government. Also the excessive increase in internal and circular debts in the energy sector would further increase the budgetary expenditure.
The SBP report states that the foreign direct investment (FDI) for July-Oct FY10 is 15.5 per cent lower than what was in the corresponding period of last year. The main reasons are the deteriorating law and order situation and low activity in the privatization process.
The tax-to-GDP ratio was already low at 9.8 per cent in FY09 and may decline further from this level in FY10. So the report has rightly emphasized the significance of increasing tax-to-GDP ratio due to the increasing development needs and large expenditure on debt servicing. The tax-to-GDP ratio can be increased if tax evasion is controlled. However, it is rather a sad dilemma that on one hand people evade taxes, and on the other hand expect the government to provide them with all kinds of benefits and facilities.
The report's claim of the prevailing positive trends is welcoming, but it is feared that these trends might not be sustainable due to the unending terrorist attacks, growing political heat, harsh energy crisis, low FDI, poor chances of investment and privatization, and above all the IMF's harsh conditions in the form of surging utility bills would very soon be creating negative trends in our macro-economic environment. In such circumstances, controlled government expenditure, restricted borrowing from the banking sector and fast growth in the service sector is vital.
In a nutshell, bearing in mind what the report says, there lies many challenges which the government needs to confront as soon as possible to improve the country's economic situation. These include, improving the growth rate of the economy, making required investments in the manufacturing sector, improving the country's infrastructure, establishing training and vocational institutes for developing skills of labour and making efforts to achieve a high tax-GDP ratio.
Source: http://jang.com.pk/thenews/mar2010-weekly/busrev-08-03-2010/p5.htm
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