SBP REPORT ON PAKISTAN'S ECONOMY

 

By AMANULLAH BASHAR
Feb 21 - 24, 2000

Despite all odds and evens against the recovery of the national economy, the release of a second report by the State Bank of Pakistan regarding the state of Pakistan economy is however reassuring that our economic managers are not only vigilant to the situation but also sharing it with the people of this country.

The report has come out with both negative as well as positive developments of the current state of economy which should be taken as a step to win the confidence of the general people.

Although structural problems still abound, latest data on selected indicators provided basis for cautious optimism on a possible turnaround in the economy in the months ahead during the current financial year, the report observed.

Upsurge in the Stock Exchange activity, a noticeable pick up in the credit to the private sector, impressive increase in industrial production and in a number of agriculture crops have been pointed out as some of the important positive developments, however the report admits that there are still no indications that new private investment is taking place on a significant scale while complementary public investment is constrained by budgetary considerations. The road to recovery still remains rocky and arduous due to the structural difficulties. Though the revival in output growth in the short term has resulted from favourable weather and better utilization of existing capacity, long term prospects for sustainable growth have not shown any improvement. External payment pressures have been eased temporarily because of the rescheduling of debt owed to Paris and London Clubs.

Imports

The terms of trade were unfavourable due to decline in the unit value of main exports and rise in the prices of petroleum products. Trade deficit will exceed the target for the year due to larger than expected imports. The import bill at the end of the current financial year may surge by $1.50 billion as compared to the last year because of abnormal rise in the petroleum prices in international market. During 1998-99 imports closed at $9.431 billion and at the end of this fiscal the bill of imports is expected to cross the mark of $11 billion.

SBP report says that imports depicted an increase of 11.5 per cent to $4,885.8 million during July-December 1999 as against a sharp fall of 19.9 per cent in the corresponding period of 1998.

The rise in imports would have been much larger but for the reduction in the imports of major food items and machinery group which recorded declines of $286.1 million and $118.7 million respectively during July-December 1999.

Exports

Exports aggregated $4.102.7 million during July-December 1999, showing a rise of 7.4 per cent in contrast to a fall of 12.0 per cent in the same period last year. Despite falling international prices of almost all major export items particularly of lint cotton which influence the prices of low value-added textiles, the rise in exports was mainly accounted for by enlarged exports of textile manufacturers, rice, fish and fish preparations and carpets and rugs. On the other hand, significant declines in exports were witnessed under sugar and leather and manufactures during the period under review. The net increase of $190.6 million in textiles exports resulted exclusively on account of higher export volumes of almost all the items except towels and cotton bags and sacks.

The decline in exports of sugar and leather demands a careful study of the situation because the leather and leather manufacture are the major contributors to our exports.

According to a major leather exporter, this sector has the potential to attain a height of $1-2 billion exports provided cost of production is reduced and an aggressive marketing campaign is launched together by the government and the private sector jointly.

Lending

One of the problems that seems to have restarted the growth of the private sector is high lending rates. A number of steps were taken in the recent past to remedy this problem and put downward pressure on the lending rates and to increase the flow of credit to the private sector at lower cost. SBP lowered its repo rate twice during the year. The repo rate was reduced from 14 per cent to 13 per cent on May 19,1999 and to 11 per cent effective from January 5, 2000. In wake of above initiatives the five major banks also announced a reduction in their lending rates by an average of 1.5 to 2.0 percentage points first in April 1999 and again January 2000. Therefore the monthly weighted average rate of return on advances declined to 14.4 per cent in December 1999 from 14.75 per cent in November 1999. The reduction is quite visible in respect of marginal borrowers.

Credit

Sectoral distribution of credit during July-December 1999 revealed that sizable credit extended by scheduled banks was availed by textile manufacturers Rs11.7 billion to meet working capital requirement compared with Rs11.6 billion availed in the corresponding period last year. Other manufacturers availed Rs10.1 billion to fulfil working capital needs compared with a smaller amount of Rs5 billion last. Credit to small business went up by Rs2.3 billion compared with Rs1.0 billion last year. Credit to small business is of vital importance for rapid growth of a cottage industry in Pakistan. In fact this sector has always been neglected and the banks were never open to the small borrowers. The present government as a policy matter has taken some initiative in this respect, yet the due importance of the small business has yet to be recognised in Pakistan.