Daily Times

KARACHI: The State Bank of Pakistan has called for containing unnecessary imports and expanding the export base in order to keep current account deficit at manageable level. It also called for rational utilisation of water in country to ensure future supplies.

In its annual report on the state of Pakistan’s economy for the fiscal year 2016-17, the SBP highlighted four major challenges that need to be addressed to sustain expansion in the economy with low and stable inflation: switching away from consumption-led to investment-cum-export oriented growth; reducing current account deficit to manageable levels; alleviating credit constraints for SMEs and, enlarging the resource envelope and creating the fiscal space required to fund infrastructure and social development projects.

“Moreover, to maintain the current pace of spending on infrastructure and social development projects, the growth in revenue collection needs to be accelerated. This can be achieved by deepening the reforms initiated at federal level and stepping up efforts by provinces to enhance their own tax collection,” it said.

The report also suggests further improvement in business conditions to strengthen recovery in investment and thus help switch away from current consumption led to investment-cum-export oriented growth.

The central bank also suggests that the private sector also needs to venture in export of agriculture and dairy products by generating exportable surplus through enhanced crop yields and reduced cost of production by encouraging corporate farming. “In this regard, the importance of managing water resources and their efficient utilisation in agriculture using latest technologies (like drip irrigation system) can hardly be overemphasised. In fact, this has become extremely important as the gap between slowly falling water supply and growing demand especially due to rising population and urbanization has been increasing steadily,” it said.

“In addition to increasing the foreign exchange receipts by stimulating exports, there is a need to contain import of unnecessary and luxury items, meant for consumption, in order to reduce trade deficit and narrow the current account deficit. As the government aims to achieve higher GDP growth in FY18 and given increased dependence on imported machinery and raw material, the import growth may continue to remain high. In this context, Pakistan should discourage unnecessary imports to finance those of capital goods and essential raw materials to strengthen recovery in investment,” the report added.

In order to increase revenue generation, the central bank noted that the reforms already initiated at the federal level need to be deepened further, particularly aimed at improving tax administration and broadening the tax net. In addition, the provinces also need to step up efforts to enhance their own revenue collection. “This is particularly important in the context of fiscal decentralization and devolution plan. As provinces get a major share from tax collection under the 7th NFC Award, this does not leave enough resources with the federal government to meet debt servicing and defense needs. Therefore, the provinces are expected to generate surplus by enhancing their own tax collection – especially from sales tax on services and income from real estate and agriculture – and thus help keep fiscal deficit at manageable level,” the report said.

The central bank’s report also highlights the issue of growing water stress in the country amid erratic supply and continuously increasing demand in the face of rising population, rapid urbanisation and high wastage. It further points out that quality of both the surface and ground water has deteriorated due to pollution and excessive use of fertilizer and pesticides. It underscores the need for improvement in management of water resources through minimizing losses and encouraging conservation to ensure smooth future supplies for human consumption and its commercial use.

About the economic performance of the country during previous fiscal year FY17, the report noted that Pakistan’s economy continued to expand with real GDP growing by 5.3 percent in FY17, the highest growth achieved during the last 10 years. A sharp recovery in agriculture sector, healthy value addition in the services sector, and continued improvement in manufacturing sector contributed to this broad based growth. From the demand side, the growth was led by a surge in consumption followed by a moderate increase in investment.

The report says that the major impetus to economic activity came from an accommodative monetary policy and consequent increase in private sector credit especially for fixed investment; tax incentives for agriculture, exporting industries and investment; a steady increase in development spending; and, continuing work on infrastructure and energy projects under CPEC. These factors led to increase in domestic demand.

With the increase in domestic demand, imports also picked up pace. This, together with decline in exports and remittances, resulted in current account deficit increasing to $12.1 billion in FY17 compared to $4.6 billion in FY16. The report noted that higher official and private inflows helped to partially finance the current account deficit.

The report recognised that tax incentives and steady increase in development spending had helped economic activity. These led the fiscal deficit increasing to 5.8 percent of GDP in FY17 compared to 4.6 percent in FY16. Meanwhile, though inflation trended upward, it continued to be well anchored and remained lower than the target for the third consecutive year in FY17. The average CPI inflation rose to 4.2 percent during FY17 after falling to 2.9 percent in FY16.

Published in Daily Times, October 13^th 2017.