Economic Activity Shows Growth.
"appears" to have turned a corner during the third quarter of FY14, and sentiments about the economy "seem" to have improved.
One may never know the answer to that question, for its always debatable as to what the SBP might actually be thinking. But, here are
a few of its relatively concrete observations. "It must be said that these signs of improvements should not discount the challenges faced by the economy; and efforts for much needed structural reforms should continue," the SBP said.
On the subject of LSM growth, the SBP said that it is not broad based. "This uneven growth can be traced to structural imbalances that need to be addressed," the report said, while casting doubts over the ability to achieve full-year LSM growth of 5.3 percent estimated by the government. The SBP says that total public debt (external plus domestic) has already crossed the limit of 60 percent
of GDP, 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
In perhaps one of its most vocal statements, the SBP has shown serious concern over corruption in public spending. "The importance given to transport and construction at the provincial level is also intriguing. While the differences in sub-national development priorities can be attributed to individual provincial needs, a review of literature on the determinants of public spending provides another perspective," the SBP said. Citing a set of multi-year academic studies from across the world, the SBP said that the composition of government spending is often shaped by the degree of inefficiencies and wastages of financial resources in a country. The types of government expenditure
opportunities for bribe other types of rent seeking are often prioritized rnance is poor. "As a stments in huge projects highways, airports, etc.) re public funds compared ector."
udy cited by the SBP t corruption plays an role in distributing t spending between ctors. "Specifically, it ending on defense, fuel, ices, law and order at the nding on social sector." esis surely seems familiar But, interestingly, going sis, KPK and Punjab are head to head on possible corruption in government spending, whereas the oft blamed Sindh is faring better.
While SBPs third quarterly report talks about how rupees appreciation might affect remittances it fails to delve into on how rupee appreciation would impact Pakistans trade balance going forward. The only thing the report said on the subject is that a part of the loss of competitiveness "could be offset by the availability of cheaper imported inputs, which most Pakistani exporters are dependent upon". For a subject so complex and hotly debated in political and economic circles, one would expect the SBP to shed more light on it than just two lines.
Because of the gap between imports and exports, the trade deficit remains at an elevated level of $12.2 billion during July-March, FY14.
Also, the Real Effective Exchange Rate (REER) has appreciated by 8.0 percent in Q3-FY14 and its potential impact on the trade balance needs to be monitored carefullygoing forward. Nevertheless, mainly due to robust growth in worker's remittances, the external current account deficit, at $2.3 billion, seems quite manageable at this point in time. This is because the capital and financial account net flows have also improved to $2.2 billion, considerably easing the pressure on the balance of payments position. In fact, the SBP was able to meet the IMF's adjusted Net International After including the better-than- projected inflows from the issuance of Euro bonds of $2 billion and other inflows from multilateral sources in April and early May 2014, the SBP's foreign exchange reserves have increased to $8.0 billion by 9th May 2014 from $5.4 billion at end-March 2014. This marked improvement in reserves and the consequent stability in the foreign exchange market is the main indicator
of improved sentiments in and about the economy. In turn, these sentiments could help in attracting more financial inflows and thus lead to further increases in reserves.
The SBP also remains committed to play its role in ensuring further accumulation of reserves to achieve adequate levels in the medium term.
Despite a shortfall in tax collection compared to the budgeted target, the government has been able to contain the fiscal deficit
at 3.1 percent during July-March, FY14. Consequently, government borrowing for budgetary support from the banking system has come down to Rs276 billion during 1st July - 2nd
May, FY14 compared to Rs1021 billion during the corresponding period of last year. In particular, government borrowing from SBP shows a net retirement of Rs287 billion as compared to an increase
of Rs393 billion last year. Moreover, the government was also able to keep its borrowings from SBP below the IMF target for end-March 2014. Based on a balanced assessment of these considerations, the SBP's Board of Directors has decided to maintain the policy rate at 10 percent