Central bank asks government to put reforms on fast track

KARACHI: The government must act ‘fast-track’ to enact important reforms to control fiscal deficit because continued growth in spending in loss-making state-owned firms may be unsustainable in the long run, the central bank said on Tuesday.
“The government has formulated a medium-term strategy to implement fiscal reforms, ranging from improving revenue generation to promoting private sector participation in loss making PSEs,” the State Bank of Pakistan said in its first quarterly report for the fiscal year 2014-15.
The central bank said falling oil prices would not enough to keep the fiscal deficit within the target of 4.9 percent of the GDP unless structural reforms gains momentum.
“Plans are also underway to restructure Pakistan Railways, Gencos and Discos, so that these PSEs can contribute positively to Pakistan’s economic development. However, these plans should be fast-tracked, with a specific focus on their managerial and operational inefficiencies, and their spillovers on the fiscal sector and the rest of the economy,” the central bank said.
SBP trimmed its forecast for inflation to 4.5 and 5.5 percent for the current fiscal year from 6.5-7.5 percent “as consumer price index (CPI) inflation is likely to end up much lower than initial expectations.”
The government has steadily been reducing retail petroleum products’ prices in line with international oil prices—which fell almost 60 percent during the past six months.
Pakistan’s year-on- year inflation tumbled to 3.88 percent in January, the lowest since 2008 on the back of falling energy and fuel prices.
“Pakistan’s external sector would benefit most from the decline in oil prices in subsequent quarters, as petroleum directly makes up nearly 35 percent of the import bill,” SBP said.
Pakistan’s economy is expected to grow by 5.1 percent in the fiscal year to end-June, though the central bank said risks to macroeconomic stability still persist.
“It is too early to conclude whether or not this target is achievable; however, preliminary estimates suggest some difficulties in the commodity producing sector,” the bank said.
“LSM growth posted a decline in Q1-FY15, as local manufacturers faced gas shortages… Furthermore, textiles also remained dull on account of lower demand for yarn and fabric from China and Bangladesh. The fall-out of a weak commodity producing sector can also be seen in wholesale and retail trade activity.”
SBP said overall trade deficit increased by $1.6 billion in the first quarter of current fiscal year and the increase was partly compensated by $765 million increase in home remittances during the quarter.
“The rising current account deficit, coupled with the uncertainty in the FX market, was one of the key factors that guided SBP’s decision to keep monetary policy tight during July-September, 2014.”
The central bank also mentioned that positive outlook on the external sector, and low inflation in the second quarter of FY15, helped the SBP cut key policy rate by 100 basis points to a multi-year low of 8.5 percent in January.
The central bank said government borrowings remained lower during Q1-FY15 compared to last year because the government was able to borrow more from non-banks via PIBs and NSS.
“Within the banking system, instead of borrowing from the central bank, the government borrowed from commercial banks, which also remained lower than the same period last year,” it said.
The SBP advised the FBR to increase its tax collection revenue. The FBR had envisaged a growth of 24.0 percent in tax collection during the year, but achieved only 13.1 percent growth in the July-September FY15.
The bank said economy faced several challenges in the initial months of fiscal 2014/15 but “the successful discussions with the IMF over the fourth and fifth reviews of the Extended Fund Facility (EFF) and its satisfaction over the progress made and output growth, and released $ 1.1 billion tranche in December last year paints positive pictures for the remaining quarters of this fiscal year. “
“Moreover, Pakistan successfully issued Sukuk in the international market in November 2014 and was able to mobilize $1.0 billion,” it added.