| |
SBP counsels new govt of
economic challenges
THE central bank has warned of stiff economic challenges to
Pakistan, as the new government gets launched. How will the new
government tackle grey areas of the economy? Business, industry, and
financial big-wigs are watching. The Ministry of Finance (MoF) brief
recommends no relief to the people before the next national budget
for fiscal 2008 that starts July 1. It will be unveiled in June. MoF
sighting the present precarious financial situation, of the country,
recommends adhering to ‘financial discipline to sustain the current
growth momentum’. The plans, the government wishes to implement
range from lowering food prices, to reduce nationwide power outages,
and more jobs to housing for the poor. Prime Minister Syed Yousaf
Raza Gilani’s latest unveiling of his ‘100-Day Plan to boost the
economy was followed, two days later, with a grim report by the
State Bank of Pakistan (SPB), the central bank. SBP’s state of the
economy report is for the half year to December 31-the first half of
the current fiscal 2008. On the back of the election promises,
Gilani is hard pressed to implement a relief plan. In order to
provide immediate relief to the common man every member of the
Cabinet will be required to closely adhere to the 100-Day Plan of
the government. The whole nation is looking forward to policies that
will be made by this Cabinet to bring about improvement in their
life.
The plan includes improvement in energy, wheat, and unemployment
situation. Initiatives have to be taken in this regard.
“Load-shedding not only causes inconvenience to the people but also
hampers growth of industry in addition to discouraging investors he
says. Ishaq Dar, the new Minister for Finance, from the second
largest Coalition partner— Pakistan Muslin League (Nawaz) (PMLN),
has largely to carry the cross treading between SBP’s grim
projections and Gilani’s 100-Day Plan. The SPB report reveals that
most of the major economic indicators are headed down and against
growth. The outgoing government’s record high spending, fudging
figures which SBP describes as “understatements,” have “compounded
the situation.” Hoping against hope, SPB still feels GDP growth this
year will be 6.0 to 6.5 per cent, but not the targeted 7.2 per cent.
“The fiscal deficit has turned into a threat” but SBP insists even
this description is ‘understated’. It says the fiscal deficit is
already 3.6 per cent, trade deficit 7.9 per cent, and current
account deficit 4.8 per cent of GDP. The budgetary balance is minus
5.2 per cent. Government borrowing from SBP, in 8-months to February
rose sharply to a record Rs359.3 billion, as against just Rs25.6
billion (b) in the like period of fiscal 2007. Subsidies on imported
oil, wheat and food are a key cause of this deficit scenario.
Besides the officially stated deficit, the outgoing government also
provided the Oil Marketing Companies (OMCs), many of them foreign
based, guarantees on the basis of which the companies borrowed
heavily from commercial banks. This borrowing will further compound
the picture of the deficit next year, the SPB says. SBP describes
the rising inflation as the ‘real woe of the economy. ‘It says,
“inflationary pressures in the domestic economy have continued to
mount throughout July-Feb 2008”. despite the central banks efforts
to contain the growth in aggregate demand. The headline Consumer
Price Index (CPI) inflation rose to 11.3 per cent YoY in February
from 7.0 per cent in June, 2007, on the back of the government’s
budget deficit, heavy borrowing from the central bank, and high
prices of imported oil, wheat, edible, oil and other commodities.
Worst of all — and a big woe to the new Cabinet — CPI food inflation
started rising in September, reaching a peak of 18.2 per cent in
January, 2008 — the highest level since April 1995.
SPB claims it eased to 16.0 per cent in February. But the latest
government data says the Sensitive Price Index (SPI), covering key
food items, rose 17.35 per cent during the week-ended Mach 28. “The
rising fiscal deficit and its financing pose severe complications
for the monetary policy framework for fiscal 2008. It has eroded the
impact of monetary tightening measures undertaken (by SBP) in
August, 2008 and “increased the risks of a further surge in
inflationary pressures.” The farming sector will achieve ‘a
reasonable growth’ but may not attain its 4.8 target because of
smaller raw cotton and rice crops. On the other hand, industrial
output of large scale manufacturing (LSM) in the first half declined
to 4.5 per cent, as against an increase of 8.3 per cent in the like
period of last year. The downtrend in industry was widespread. “LSM
has been encountering headwinds since the start F-08, because of
domestic and external factors. The slowdown was broad based, and was
seen in 11 out of 15 industrial groups. Of these, paper and board,
metals, fertilizers, and electronic industries registered a decline
in production. But growth of pharmaceuticals, petroleum oil and
lubricants, cement, engineering and wood industries was reasonably
strong. The services sector, unlike others, put up a “robust
growth,” on the back of telecom and electronic media, and cellular
phones as the tele-density more than doubled during 18 months to
December, 2007. Increased inflows of FDI helped this growth. The
central bank says increased banking profits, and improvement in
value addition by other financial institutions, is expected to
support the high growth momentum in finance and insurance
sub-sector.
Commercial bank credits to private sector rose 11.7 per cent in
eight months, compared to the like period of fiscal 2007, as the
demand for working capital rose. A decline in industrial output,
reduced textile exports, a big rise in commodity prices abroad, a
grave electricity and natural gas crises and a slowdown in demand
adversely hit GDP. The December 27 assassination of former Prime
Minister Benazir Bhutto, and the riots it ignited, too, hit growth.
The forex reserves declined from $15.6 billion in July, 2007 to $
14.1 billion in February. The Rupee depreciated 3.5 per cent against
the Dollar, in eight months to February. SPB estimates full year
exports at $19.7 billion, against the target of $18.9 billion. The
export growth in July-January period was entirely due to rise in
non-textile exports. The textile exports recorded a 3.4 per cent YoY
decline in this period.
Imports for the full year will rise to $32.1billion, against a
target of $29.6 billion. Half of the total increase in import bill
in eight months was due to rising international prices of oil,
fertilisers, palm oil, while wheat and cotton. Full year home
remittances, sent by overseas Pakistanis, especially those working
in UAE, Saudi Arabia, US and UK are projected at $6.0 to 6.5
billion, against $5.8 billion in fiscal 2007. Remitances in the
first eight months were $ 3.6billion up from $3billion in the like
period of 2007. While the new government may have to spend more to
implement its 100-Day Plan, the SBP advises it to “exercise fiscal
responsibility, and restrict borrowing from the central bank to
finance its expenditure,” to check spiraling inflation sparked by
deficit financing. But, can these conflicting government and SBP
objectives be reconciled? One has to watch.—KT
|
