SBP’s unguarded optimism

The State Bank of Pakistan (SBP), in its second quarterly report released on Friday, said that current account deficit had almost doubled compared to the last year. Yet the report tried to provide justification stating that it was due to surge in growth-inducing imports along with non-realisation of CSF and decline in exports and remittances. The government has indeed failed to meet the targets of fiscal deficit, trade deficit and current account deficit, but the report says that “the overall economic environment remained conducive for growth, on the back of accommodative monetary policy, increase in development spending, and CPEC-inspired activities.” The report shows that average CPI inflation had risen from 2.1 percent in H1-FY16 to 3.9 percent as in H1-FY17, which reflected higher domestic demand and an increase in global commodity prices.
One would not agree with the SBP that surge in the import of machinery and raw materials points to a robust industrial activity and increasing productive capacity in future. As a matter of fact, SBP has been resorting to the same logic for substantial gap in imports and exports, but the figures of tax collection and decline in production and exports belie the claims of SBP and the Finance Minister Ishaq Dar. However, one can see the concern in the report highlighting the need to contain the current account deficit to manageable levels to sustain external sector stability. However, the report expressed optimism that in future the agricultural production would increase vis-à-vis maize and sugar, and large scale production is also likely to increase. But such conjectures were part of the 1ste quarterly report for 2016-17.
Despite the fact that the economic indicators were not encouraging at all, the State Bank of Pakistan in its first quarterly report for 2016-17 had stated that the preliminary macroeconomic data signaled a stable growth momentum. The optimism was based on production of sugar and maize, which is a small part of the economy. The report had noted the increase in the average headline CPI inflation from 1.7 per cent in July-Sept 2015-16 to 3.9 per cent in same period 2016-17. For the full-year, the CPI inflation was expected to remain within the target of 6 per cent for the year. The report highlighted the increase in fiscal and current account deficits in the first quarter, and had pointed out that this YoY increase was driven primarily by the absence of inflows under Coalition Support Fund (CSF). Of course, the current report said that it was also because of decline in remittances from expatriate Pakistanis.
Anyhow, Finance minister Ishaq Dar while boasting about the highest ever reserves of $24 bn, he combined $19 bn reserves held by the State Bank of Pakistan with $5 bn reserves held by the private banks. According to SBP website, Pakistan’s total external debt and liabilities as at 30th September 2016 was $74.6 bn. The rising debt results in an increase in debt servicing and leads to increase in fiscal deficit. Secondly, Pakistan would be constrained to abandon development projects and find difficulty in allocating adequate resources for defence. Perhaps this is the objective of the big powers and its proxy the IMF, who can bring Pakistan on the verge of bankruptcy. To avert the economic disaster, the government must take measures to get rid of the dependency syndrome; it should show zero-tolerance to corruption, tax evasion, wastages and mismanagement in public sector enterprises.