Editorial SBP Annual Report 2013-14 On Wednesday, the State Bank of Pakistan released its report on the state of economy for the year ended on 30th June 2014, which showed tangible improvement in country’s foreign exchange reserves, appreciation of Pakistani rupee and reduction in the fiscal deficit. Furthermore, the inflation rate has been lower than expected. “With the start of a new IMF program, external inflows from other international financial institutions (IFIs) also began after a gap of almost three years, which helped stem the gradual depletion of SBP’s foreign exchange reserves”. The SBP views the fiscal deficit at 5.5 percent of GDP, which is significantly lower than the FY14 target of 6.5 percent as compared to trends in the past three years. According to the report, there was a concerted effort on the part of the government to contain expenditures and generate additional revenues. The decline in global oil prices, mobilization from the Eurobond and the successful divesture of UBL shares, coupled with a smaller underlying fiscal gap, sharply reduced government borrowing from the banking system (especially SBP). After two consecutive 50 bps increases, SBP held its benchmark rate for the remaining part of FY14. From the supply side, lower government borrowing from the banking system and healthy growth in deposits created the space for commercial banks to lend productively. The key message in the external sector, as reported by the SBP, is that while the overall size of the external gap was manageable in FY14, financing it was quite challenging. At the start of the fiscal year ( in the first quarter of 2013-2014) SBP’s foreign exchange reserves were falling because of significant IMF repayments that persisted till November 2013. Although export revenues remained stagnant, remittances from expatriate Pakistanis were higher by US$ 1.9 billion as compared with last year, showing an increase of 13.8 percent. The strong growth in remittances partially offset the impact of a rise in trade deficit and other factors on the current account balance. There was latent warning in the previous SBP’s review of monetary policy that in view of political crisis, a possible shortfall in tax revenues, recurrence of energy sector circular debt, and delays in budgeted foreign inflows could stir inflation to the detriment of the people. But latter developments defied those predictions and there is overall improvement in macro-economy due to reduction in oil prices, as revealed in the Annual Report. However, there are concerns about increase in electricity and gas tariff that could have cumulative effect on cost of production. In this case, Pakistan will not be able to compete in the world market, apart from increase in prices in the domestic market. People have already been suffering from ever-rising prices of commodities of daily use, and with electricity tariff twice revised upwards would erode the effects of downward revision of oil prices. In fact, it has become difficult for the fixed income groups and salaried class to keep their body and soul together. The government has done well to reduce prices of petroleum products, but the transporters have not passed on the benefit to the commuters. This is also the reason that commodities of daily use have not been reduced. The government should also reduce electricity tariff because IPPs are producing electricity from furnace oil, the price of which has also declined by about 40 per cent. Last month, the SBP reduced discount rate by 50 paisa basic points, but it is still much higher as compared with other countries of the region. Of course, interest rates are very low around the developed world; near-zero in nominal terms and negative in real terms. But this is part of a deliberate policy by central banks in Europe and elsewhere to discourage savings and encourage borrowing/spending. In developed countries, there is handsome pension on retirement, and the government also pays dole to the unemployed citizens, therefore domestic savings are not important. But in Pakistan, in the absence of welfare plans, people have to save for old age or rainy days. They would have little incentive to save if the interest is very low; or if inflation, which erodes the income of salaried class and fixed income groups, is more than the interest earned on savings.
Posted on: Fri, 12 Dec 2014 06:16:37 +0000
Trending Topics
Recently Viewed Topics
© 2015