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Grappling with low savings and budget deficits.

(Following is the text of speech of the Deputy Governor, State Bank of Pakistan. M. Ashraf Janjua, delivered at the inauguration of the Second Commonwealth Executive Development Programme in Commercial Banking - 1992)

I am delighted to be here with you this afternoon to formally inaugurate the 2nd Commonwealth Executive Development Programme in commercial banking. I extend on my own behalf and on behalf of the State Bank of Pakistan a warm welcome to the participants of this programme and wish them a happy and a comfortable stay in our country. Although the participants are senior officials of commercial banks and have had exposure to varied experience there is always a scope to further improve and sharpen the professional skill. It will be our effort to share our experience in Pakistan with these participants together with providing them opportunities for cross fertilization of ideas on a range of subjects in the field of finance.

In recent years the world of finance including, in particular the banking sector have witnessed extremely important changes. We are all familiar with these changes. These changes constitute challenges to the bankers. Hopefully the banking community all over the world will not be found wanting in meeting these challenges, particularly in maintaining an atmosphere of stability and confidence which are so necessary for the sustained economic growth. Under these circumstances a banker anywhere in the world has a role to play.

I am sure the experienced bankers, economists and other financial experts invited to address the participants would be sharing their experience about the growth of banking in Pakistan. On this occasion I would like to share with you my perception of the economic management and economic development in the country.

In the past 10 years or so we have achieved an impressive growth rate with relative price stability. This has been a commendable performance in face of many unexpected upheavals and unforeseen developments. Among other things this performance indicates the basic resilience of the economy. In the past few years the country has witnessed frequent changes in political regimes, yet the economy has maintained an impressive growth rate together with manageable increase in prices. It is imperative that all the efforts are mobilised to ensure a growth rate that provides visible improvement in the living standard of people within their life time. While the basic strength of the economy and the strategy apart, there are a number of problems which need to be addressed more or less on a regular, sustained basis if the future growth of the country has to be ensured. I will call these problems as seven challenges facing the economic managers, planners and decision makers and above all the political leadership in the country.

First of all, Pakistan society over the years has developed into a high consumption society. Level of national savings is very low for a country with a per capita income of about $400. Even in 1991-92 when the growth rate has been quite impressive and private investment has shown an upsurge the national savings as a percentage of GNP have marginally declined together with private savings showing a sharp fall in absolute level. More than one-fourth of total investment during 1991-92 has been financed from foreign savings which have direct implications for the debt profile of the country. Such a situation is not sustainable. The second problem partly related to the problem number 1 is the unsustainability of twin imbalances in the economy namely the fiscal and balance of payments deficit. Fiscal deficit has been quite large in recent years and has been increasingly financed from bank borrowing leading to an unanticipated increase in expansion of money supply. Such increase in liquidity is bound to show itself in the form of price pressures with a certain time lag. It is high time measures which were taken both on the side of resource mobilisation and containing non-development expenditure so as to bring down the size of fiscal deficit. Failure to reduce the size of budget deficit would mean further deterioration in the domestic profile and greater budgetary burden of servicing the debt. More importantly, any sustained increase in prices may mean price rise becoming a part of expectations of savers and investors and eventually eroding the confidence in the country's currency. Large deficit in the balance of payments is partly the result of the recent reforms. However, continued balance of payments deficit of this size would mean greater foreign debt burden and its obvious impact on exchange rate and capital outflows.

The third challenge pertains to the need for a review of development priorities. An appraisal of the economic growth so far indicates that large-scale industry which has made use of all the fiscal, monetary and commercial policy incentives has not made commensurate contribution to employment, savings and export expansion. Therefore, development priorities need to be appraised in terms of contribution to three sectors namely employment, savings and export expansion.

The fourth challenge pertains to the need for population control and development of human resources. In this area a great deal needs to be done. In the area of population control the three measures are called for are:

i) commitment of the political leadership at all levels of the society. One feels that the political commitment to perpetuate control was much greater and more obvious in the Sixties than it is now,

ii) the involvement of religious leaders and

iii) the involvement of female population at the operational level. Both the human development and population control are neglected partly because they do not offer immediate political dividends.

The fifth area pertains to adoption of technology as the prime mover of transformation of the economy. The progress towards the adoption of technology is far from satisfactory. Whether we look at the share of modern sectors to the economy, the consumption of iron and steel, number of technicians and scientists it puts us technologically poor. Technology has to be accepted as a way of life.

The sixth problem pertains to development of physical and social infrastructure. In my view there has been excessive emphasis on showing impressive growth rates of the GDP, not infrequently at the cost of infrastructure. The physical and social infrastructure has not kept up with the requirements of the growing economy and the growing population. This trade off has not been in the long-term interest of the economy.

Finally, we have initiated a broad-based programme of deregulation, liberalisation and denationalisation. Whereas substantial progress has been made and there are clear indications of the economy having responded to these reforms a great deal remains to be done. In the financial sector our target should be the operation of our economy where the rates of return are fully flexible, central bank takes initiative on its own with sophisticated market-based instruments and information system and manages money market liquidity at its own direction. Secondary, markets are developed so that market rather than the discount window provides liquidity, capital market is deep and broad-based and payments system is modernised. In other areas our targets should be the mobilisation and allocation of resources in a context where the prices reflect the scarcity of factors of production rather than on direction and regulation.
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Title Annotation:speech of M. Ashraf Janjua, Deputy Governor of the State Bank of Pakistan
Publication:Economic Review
Article Type:Transcript
Date:Oct 1, 1992
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