KARACHI: Pakistan's economic growth of 3.7 percent during FY12 is higher than 3.0 percent realized in previous year, but less than target of 4.2 percent.
Nevertheless, this performance is notable, given considerable damage to cotton crop due to floods in August 2011; ongoing energy shortages; rise in international oil prices; and security concerns," State Bank said in its Third Quarterly Report for fiscal year 2011-12 on State of the Economy released on Friday.
This growth has also been "more broad-based with a larger contribution from commodity producing sectors compared to FY11. Moreover, as in the past, growth has been driven by domestic consumption (both private and public), which was partially offset by a decline in domestic investment and external demand," Report said adding that continuous decline in investment since macro instability in 2008, is
"a source of growing concern as it will stifle long term growth of economy."
It observed although Pakistan’s economy has shown some recovery in terms of GDP growth, key macro indicators still remain weak. Persistent inflation and pressure on fiscal and current accounts, remain key challenges for economy. While low investment and energy shortages have direct growth implications, persistently high fiscal deficit remains a major risk to macro-economy. Current information suggests a
budget deficit of 4.3 percent of GDP for Jul-Mar FY12, and it appears that budgetary gap for full year will exceed revised target of 4.7 percent, it said. Overall revenues are lower than expected.
Though growth in current expenditure is lower compared to previous year, government has enhanced its development spending. "While such spending should improve long-term growth prospects, this also creates financing pressures. At same time, despite efforts to reform public sector enterprises (PSEs), operational efficiency of key PSEs has not improved. This continues to add to the country’s fiscal burden.
Report said in terms of financing this gap, government relied more on domestic sources as external financing dried up and borrowed Rs 847.5 billion in Jul-Mar FY12 from domestic sources, compared to Rs700.1 billion in corresponding period of FY11. Lately, this has been increasingly skewed towards borrowing from SBP.
"Such borrowing is inflationary and risk to macro-stability. Currently, two Acts – namely Fiscal Responsibility and Debt Limitation (FRDL) Act (2005) and newly amended SBP Act– provide guidelines on overall debt stocks and borrowing from the central bank, respectively,"
It said large fiscal deficit has resulted in sharp increase in Pakistan’s debt.
Government domestic debt recorded increase of Rs1.2 trillion during Jul-Mar 2012 to reach Rs7.2 trillion. There is greater reliance on short term borrowing, which is creating liquidity management problems for central bank, and rollover and interest rate risks for the government.
With government’s growing appetite for funding, banks have little incentive to finance private sector.
At the same time, demand for private sector credit is likely to be dampened this year, as loans to private businesses increased by only 1.8 percent in Jul-Mar FY12 – lowest growth rate in past 10 years, it said. Slowdown is concentrated in working capital and trade financing. However, there are indications that fixed investment loans have bottomed out.
"Developments in Q3-FY12 in external sector were less adverse than we had expected," SBP Report said, adding that larger inflows of remittances and lower trade deficit, explain this relative improvement.
Current account deficit during Jul-Mar FY12 was US$3.1 billion, compared to deficit of $10.0 million in corresponding period last year. More importantly, expected inflows under Coalition Support Fund (CSF); auction of 3G licenses; and arrears from PTCL privatization, did not materialize during the quarter.
While these challenges will continue to shape the outlook for economy, it is important that GDP data should reflect changing nature and composition of the country’s economic activities. Pakistan Bureau
of Statistics (PBS) is already in process of rebasing national income accounts. "We expect that PBS would also consider releasing GDP estimates on a quarterly basis, which is now a norm in emerging markets. It will help get more accurate and timely picture of real economy, which will allow for more proactive policy corrections," Report added. (PPI)