ISLAMABAD - Improving the precarious balance of payments position, bringing down the fiscal deficit, avoiding debt trap, keeping inflation in check and yet grow are the major macroeconomic challenges that the economy is faced with’, says quarterly Economy Watch launched by Pakistan Institute of Development Economics (PIDE).
The document released examines the state October-December 2013 quarter covering almost all the macroeconomic aspects of the economy. The document also offers viewpoint on some key economic issues. The report points out that the weakness of balance of payments position, including the low level of foreign reserves, has made the Rupee vulnerable to speculative attacks with at least two spikes being observed in the last couple of months. The exchange rate has depreciated by 6.9 percent since June 1 2013. The Watch argues that the low reserves have circumscribed the authorities’ ability to counter speculative attacks by aggressively intervening in the market and this makes the rupee vulnerable. The report highlights that public debt has exceeded the limit of 60 percent of GDP specified in Fiscal Responsibility Debt Limitation Act (FRDL). The report goes on to stress that mere the act of reporting crossing of the debt limit to the Parliament, as required under FRDL, is not enough to rein in the burgeoning debt.
The document calls for a stronger proviso to respect the debt ceiling.
The PIDE Economy Watch states that though the credit to the private sector has picked up in recent months, however, with the government borrowing heavily from the SBP there is still substantial crowding out of the private sector. With government’s appetite for borrowing rather huge and SBP’s discount rate high enough, the banks have all the incentive to indulge in ‘risk-free’ lending to the SBP rather than undertake risky and time consuming lending to private sector, states the Watch.
The PIDE Economy Watch hints at the prevalence of political business cycle phenomenon in Pakistan before and after the elections of 2008 and 2013. The report argues that before the elections of 2008 and 2013 expansionary policies were pursued. Difficult adjustments like passing on the increase in oil and utility prices and adjusting the exchange rate were delayed necessitating the need to follow contractionary polices post-elections. The pre-election expansionary policies are one reason why incoming regimes inherit the economy in poor shape, states the report. The document further states that these expansionary policies are often financed by money-printing from the SBP.
Building on from this, the report stresses that an independent central bank is essential to avoid the kind of economic fluctuations mentioned above. Under the prevailing SBP act the Governor SBP is appointed for a term of three years with an option of contract renewal for another term at the discretion of the government. Arguing that the provision of renewal at the discretion of the government has the potential to compromise the independence of the Governor, the document suggest a single term of 5-6 years. The report also emphasises that a criteria and procedure needs to developed for appointment of the Governor of the SBP while benefitting from international best practices in this regard.
Commenting on the GSP Plus status granted to Pakistan for a period of 10 years by European Union, the report welcomes it as a great opportunity for the country. The report urges that while facilitating exporters to exploit this opportunity, a cost-benefit analysis would be essential, especially if this involves diversion of resources from one industry to another. The case of diversion of gas from some IPPs has been cited as an example. The report also stresses that GSP plus is essentially based on the infant industry argument and the exporters should use the ten-year period to become competitive on their own in the international market.