Pakistan - State Bank Report

THE State Bank of Pakistan`s annual report for the last financial year is not just another grim reminder of an impoverished economy. It is also an indictment of various institutions whose responsibility it is to create an enabling and investment-friendly environment in the country. The report shows a decline in public and private investment the lowestin over three and a half decades. It laments poor governance, mourns the waste of limited financial resources by loss-making public-sector entities and shows concern over anaemic growth. The bank is as much worried over growing power shortages as the rising fiscal deficit on the back of increasing public expenditure and plunging tax revenues. With foreign official capital inflows drying up because of poor global economic conditions the need for deficit financing is forcing the government to borrow heavily from commercial banks.

This has diluted the SBP`s efforts to control inflation in spite of raising the cost of borrowing at the expense of private investment, exports and jobs. Moreover, it is squeezing the fiscal space for future public development spending.

The expanding current account deficit, too, remains a challenge owing to decreasing promised multilateral and bilateral financial assistance and private investment. The government`s weakening fiscal position and depleting foreign currency reserves have already put pressure on the exchange rate andescalated dollarisation of the economy. In the bank`s view, the issues of fiscal problems and energy shortages must be effectively addressed to break out of the current state of stagflation. The bank blames both internal and external factors for the current state of the economy. But it believes that domestic issues the energy crunch, low fixed investment, security conditions and poor infrastructure are `more decisive and chronic`. It also holds `institutional weaknesses at all tiers of the government judiciary, civil services, law enforcers, regulatory and accountability agencies as directly responsible for poor economic growth`. In other words, the reportunderscores the need for improving economic management, implementing fiscal and governance reforms as well as strengthening institutions for economic recovery.

However, it does not list the persisting political uncertainty in the country and key institutions working at cross purposes as a dominant factor that may have kept the political leadership from focusing on the sliding economy. It is naïve to expect a government facing all kinds of threats to its claim to power to take tough and unpopular decisions that are needed to put the economy back on the growth trajectory. The economic rot cannot be arrested unless political instability is ended and the government makes an earnest effort to rid itself of the `incompetent` tag.