It must be frustrating for the economists/researchers in the State Bank of Pakistan that its Second Quarterly Report on the current financial year (2014-15) has been issued after five months. In fact, the Third Quarterly Report–from January to March– is already due. However, it appears that the Parliamentarians for whom the quarterly report is required under Section 9A (F) of the SBP Act or else the Central Board of Directors of SBP are not eager or pushed to timely vet the report and have it issued on time, as the analyses and comments in the report may be quite upsetting for the government. The report should have been sent to the Parliament at least by March 31, 2015. The analyses of SBP experts are a fair comment on the state of economy. But the academics and researchers should know the enormous difficulties being faced by the present government – which received electoral votes on the premise it has a tested and tried economic team which could ‘hit the ground running’. After a lapse of two years the frustration of businesses in particular is understandable with lack of progress on real issues.
Coming back to the report, SBP feels that there is a window of opportunity which is yet to be availed, by Islamabad, to undertake structural reforms. Improvement in External Accounts is due to a sudden fall in international prices and a substantial rise in home remittances, as well as a softer attitude of the multilateral lenders towards Pakistan; and tapping the international bond market may have helped on this score. But these are exogenous factors and have little to do with efforts of our economic managers. Country’s Forex Reserves have been raised to three months’ of imports, improving our credit rating from negative to stable. But Pakistan is not rated as investment grade yet. In addition, governmental decision to pass some, if not all, benefits of the oil price fall and keeping the Pakistani currency parity stable with the US ‘green back’ has also softened inflationary expectations. This governmental decision has come at a cost, ie, a tilt towards imports and a fall in exports. Is that desirable? It is a million-dollar question.
Both SBP and the Fund are of the view that PKR parity should be market driven. According to SBP sources, this is happening. PKR would strengthen to less than Rs 100 to a dollar, if SBP would not purchase 50 million to 100 million dollars every week from the interbank market. The complication is that we decided to float PKR against a basket of currencies. However, the intervention currency remains the US dollar as most of our trade (72%) continues to be in US dollar. And, the recent strength of the dollar against other major currencies such as the Euro; Pound Sterling; and the Japanese Yen has resulted in creating difficulties for the Pak exporters. As such, they are asking for depreciation of PKR. This can upset all the stability that has been achieved thus far. If PKR parity is changed to say Rs 110 to one US dollar, the CPI inflation could rise from 2.5 to 6.5 percent. Therefore, SBP argues that we need to take oil price collapse as a short breather to correct our chronic balance of payment (BoP) imbalance. Further, the report says: export expansion is a must and that we need to go deeper into structural factors that are “constraining our potential: reassess country’s resource base; develop an industrial vision; pick winning sectors; design a strategy to lift them and then stick to them”. One way could be to think about giving cash subsidies to non-traditional exports. There are other ways of interventions that could be designed. All of this requires cohesion in our industrial, trade, financial and taxation policies. And, above all else upgrading the skill sets and productivity of our workforce through better vocational and technical education which at present is sorely missing.
The present government’s privatisation programme could provide the fiscal support. The direction of the present government may be right. But it is very slow in execution which needs to be quicker. Perhaps, PM Nawaz has the well-being of educated poor close to his heart. As a consequence, he seeks to have more and more business schemes for the youth to become operational. Nawaz Sharif the politician knows he needs to wean the young voters away from Imran Khan’s PTI in the next elections. However, he and his economic team need to know that all this requires subsidised funding from the budget. Expecting government-owned and -managed financial institutions to do so is barking up the wrong tree. To achieve desired results, SBP needs to provide a credit line to specialised institutions which have the expertise to lend and then monitor these small but subsidised loans. Cost of loans and not the risk is the real issue. Poor people have a better track record than the rich of paying back their loans. They may not have the collateral to borrow from banks or the means to fund the infrastructure needed by them. An educated small farmer would have higher productivity than an illiterate farmer. But he requires farm to market roads to ferry his produce quickly to the market. Therefore, combination of both what Nawaz desires and Shahbaz executes is needed. But the resources for both to succeed need to be provided by Dar. SMEs do need help in marketing their products and assistance and guidance in proper management. The government-owned and -managed SMEs and youth programmes have not worked so far because the cost of loans is high and the specialised institutions have not been manned by specialist persons.