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Posts Tagged Pakistan Risks Default

Dawn Editorial: State Bank Report

 Disastrous Nawaz Sharif Govt Spending Run Amok

State Bank Report

DAWN EDITORIAL 
— PUBLISHED 2 days ago

THE first quarterly report issued by the State Bank of Pakistan contains a few alarm bells. Thus far the SBP has been mostly optimistic of the country’s economic performance. In previous reports it has lauded the fiscal measures of the government, papered over the growing declines in exports, and celebrated the “record high reserves”. But the latest quarterly report, for the first time, sounds a few alarm bells that suggest that the government’s narrative of continuous strengthening of the economy may be running out of steam. The fiscal deficit during the first quarter reached “the highest first quarter level since FY12”. This happened “despite an exceptional growth in provincial surpluses”. Even on the expenditure side, current spending was restrained and an increase in development spending “was led by the provinces, as federal development spending posted a YoY decline of 7.6pc in Q1-FY17”. Taken together, these numbers show that the revenue effort of the government is unable to keep pace with its ambitious plans for the year, and increasingly the burden is being shifted onto the provinces. The SBP goes so far as to say that “achieving the annual fiscal deficit target of 3.8pc of GDP would be challenging. It will require additional fiscal consolidation efforts on the part of the government”.

On the external front, things are considerably less cheery. Exports continue their downward journey, but more worryingly, for the first time in four years, remittances have also registered a decline. Foreign direct investment too fell by 38pc. A more troubling sign is the overwhelming presence of China as the source of all FDI while other countries largely remained passive spectators. Taken together, these are signs that “the FX comfort available to finance a persistently high trade deficit, is now weakening”, says the SBP in the most direct words it has used to describe the external sector thus far. Even though the report tries to attribute much of this to external factors beyond the government’s control, such as fiscal tightening in GCC countries with persistently low oil prices and a “softening of demand” in traditional export destination countries, the fact of the matter is that many of our neighbouring countries saw a revival of their exports in the same months covered by the report. Given these deteriorating indicators, the SBP is right to warn that “underlying structural issues are still there”, even if the choice of words is somewhat stilted.

Published in Dawn, January 4th, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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