NationalVOLUME 15 ISSUE # 07

SBP report: A grim transition

The State Bank of Pakistan’s annual report for 2018-19 paints the picture of an economy in a state of painful transition.
According to the report, the real GDP growth rate decelerated to 3.3 percent in FY19 as compared to 5.5 percent in FY18. The major cause was a decline in the commodity producing sectors and a relatively lower pace of growth in the services sector. The headline consumer price index (CPI) inflation almost doubled from 3.9 percent in FY18 to 7.3 percent in 2018-19 due to underlying demand pressures, increase in administered prices and rupee devaluation.
The SBP continued with its monetary tightening policy throughout the year and increased the policy rate six times by a cumulative 575 basis points. While private sector credit shrank during FY19, the government’s budgetary borrowings increased substantially because of a significant increase in current expenditures and a slowdown in revenue collection. Of major concern was PSE debt which jumped from 4.0 percent to 5.3 percent of GDP during the year.
The year saw a deterioration in major fiscal indicators. Overall budget deficit reached a historic high of 8.9 percent of GDP during FY19 which was far in excess of the target of 6.0 percent fixed in the beginning of the year. The deterioration was caused by a sharp decline in revenue collection and a steep rise in current expenditures. In the external sector, current account posted a deficit of dollar 13.9 billion in FY19 which was nearly two-thirds of the deficit recorded in the previous year. The improvement in C/A deficit came from significant import compression and a robust growth in workers’ remittances. Foreign exchange reserves of the country held with the SBP dropped by more than $2.0 billion during the year. Debt dynamics of the country also deteriorated further in FY19. Pakistan’s total debt and liabilities (TDL) rose to Rs 40.2 trillion by the end of June, 2019, showing a massive increase of Rs 10.3 trillion during the year.
According to the State Bank of Pakistan, during FY20 macroeconomic stabilisation would continue to be the top priority of the government. The GDP growth rate is likely to remain subdued in the range of 3-4 percent during the year. Meanwhile, inflation is expected to exceed the annual plan projection of 8.5 percent by nearly 3 percent. However, price pressures may begin to recede in the second half of FY20, setting the tone for considerably lower inflation in FY21. The external sector’s outlook is positive on the whole. Exports are expected to pick up further and workers’ remittances are likely to remain robust during the year. The outlook for the fiscal sector was, however, not straightforward. Even if things turn out according to the plan, fiscal deficit during the current year may be around 7 percent of GDP.
Despite facing a host of problems, the present government has taken a number of steps to improve the overall economic situation. These include exchange rate alignment of the rupee rate with the market, a sharp increase in interest rates, curtailment in PSDP, rise in energy prices and deepening and broadening the tax net to raise revenue receipts. These measures, although necessary, have hurt the ordinary people hard and forced traders and businessmen to pay their taxes in accordance with their incomes. That is why most of the business community members in the country are now up in arms and pressurising the government to take back these measures or at least review them to offset some of the financial pain associated with them.
The SBP’s annual report is quite comprehensive in its coverage of various aspects of the national economy and its prognosis closer to reality than most of the other public documents. The annual report has been published at a time when most of the data for FY19 is already available in the final form. Another factor could be that the SBP Governor is not from the country’s bureaucracy and has furnished an honest view of the situation.
What is of special note is the fact that almost all the macroeconomic indicators during FY19 deteriorated, emphasizing the need for a greater effort to reverse the worsening trends in the economy and soften the impact of the past mismanagement of the economy in order to stabilise it. The GDP growth rate during FY19 was a meagre 3.3 percent and is projected to range between 3 and 4 percent during the current year. Given the present population growth rate, one cannot expect a reasonable rise in standards of living and a reduction in poverty levels in the next few years.