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Economy ‘back on track’ after five years: SBP

KARACHI: Pakistan’s economy appears to have turned a corner during the third quarter 2013-14. Revival of economic activity is a key development in FY14, with real Gross Domestic Products (GDP) growth of 4.1 percent, which is the highest in the past five years, State Bank of Pakistan (SBP) released its third Quarterly Report for FY14 on the State of Economy.
According to report after many years of low growth, sentiments about the economy seem to have improved. Manifestations can be seen in the rebound in real GDP growth, the rise in private sector credit, a contained fiscal deficit, the subdued inflation outlook, the sharp increase in FX reserves and the appreciation and subsequent stability in the exchange rate.
It mentioned improvements in the economy were the result of the government’s resolve to address the energy shortage, a growing perception of business friendly policies and external inflows that have recently been realized. More specifically, auction of 3G/4G licenses, a larger than projected inflow via Eurobonds, programme loans from the IFIs and SBP’s efforts to support the forex reserves have sharply improved the outlook of the country’s external sector and to some extent, its fiscal position.
However, the report emphasised ‘these signs of improvements should not discount the challenges faced by the economy and efforts for much needed structural reforms should continue’. These positives developments provide a strong platform to move towards sustained economic growth in the medium term.
According to the report, the recent influx of external resources not only stabilised the exchange rate, but also sharply increased SBP’s forex reserves. “As of May 30,2014, SBP’s reserves were $8.7 billion, compared to only $3.5 billion as of end-December 2013. 
While the rupee’s appreciation improved business sentiments and its subsequent stability has eased inflationary expectation, the sharp increase in the country’s forex reserves provides some comfort for domestic and foreign investment.
The report said average inflation during Jul-Mar FY14 was 8.6 percent. The stability of rupee, stable international oil prices and softer global commodity prices should further contain inflationary expectations.
On the basis of data released by the Ministry of Finance, SBP report said fiscal deficit during the first nine months of FY14 was only 3.2 percent of GDP, which was significantly lower than the average deficit in the last five years. 
The report however, points out despite efforts for fiscal consolidation on the expenditure side and tax mobilisation still remains lackluster, as Federal Board of Revenue (FBR) is still operating on a narrow tax base. 
While the FBR should take concrete steps to plug tax leakages and increase documentation of all financial transactions, provincial governments (having constitutional right to tax services and agricultural income) also need to implement provincial taxes more effectively.
On the financing side, the government mainly relied on domestic sources during Jul-Mar FY14. However, external financing has increased subsequently with the issuance of Eurobonds, fresh loans from IFIs and bilateral assistance. Although the resumption of external inflows is important for a resource-constrained economy, this will add to Pakistan’s external indebtedness.
The SBP report highlights total public debt (external plus domestic) has already crossed the limit of 60 percent of GDP, as set by the Fiscal Responsibility and Debt Limitation Act (2005) for FY13 onward. Hence, any addition to the external debt should at least be matched with an equivalent reduction in the domestic debt outstanding.
Pressure in balance of payments also eased as bulky re-payments to International Monetary Fund subsided after November 2013 and the country experienced influx of external grants, loans and foreign investment (like Eurobonds). While acknowledging this improvement, the report emphasised the need to address structural problems that continue to plague Pakistan’s economy.  
The policymakers should formulate an Industrial Policy that prioritises production efficiency and job creation. Such an initiative should focus on efforts to promote competitiveness, instead of a culture that creates and rewards inefficiencies.

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