Dec 26, 2011 - Jan 1, 20

In its annual review report released last week, the state bank of Pakistan (SBP) has admitted that the economy of the country was in a deplorable condition and almost all targets fixed for the current financial 2011-12 are likely to be missed. The central bank admitted "the root cause of all economic ills is poor governance as most indicators for effective governance in the country have weakened in the recent years."

For obvious reasons the SBP has not mentioned the word "rampant corruption" as one of the causes for the prevailing deplorable economic conditions.

According to the report, the fiscal deficit is likely to be 6.5 percent against the target of four percent. Inflation would exceed to over 12.5 percent from 10 percent and the growth rate targeted to be about 4.5 percent is now estimated to be between 2 to 2.5 percent.

According to the report, the forecast of 4.2 per cent economic growth was based on positive outlook of cotton crop, a recovery in the manufacturing sector and policy measures to address the energy shortage.

However, the agriculture outlook has once again been adversely impacted by floods in Sindh, which has damaged almost half of its area under cultivation.

Referring to the fiscal deficit, the report said, "we feel the government will again miss the target in current fiscal year with doubts on both the expenditure and revenues generation side."

The floods in Sindh and a prolonged wave of dengue fever in Punjab have created an unprecedented fiscal burden, the repot said.

The report further said, "in our view the absence of an IMF program may also allow expenditure to stray off the course, while prospects for additional revenue measures are dim."

The report said retail prices also increased because of supply-side factors including the impact of floods and the international commodity prices. "Food inflation was particularly hit hard posing a sharp 21.5 percent year on year increase compared to September 2010.î

It also said that the likelihood of achieving the non-tax revenue target is also low for several reasons. An expected $1250 million coalition support fund is more uncertain as Pakistanís relations with the US are strained and with the recent cut in the discount rate, SBP's profit could be less than the budgeted Rs200 billion and there is also a little progress on the auction 3G telecom licenses, which had been budgeted to raise Rs75 billion additional revenues during the current fiscal year

The central bank said that the outlook for current account balance remains a source of concern. The only hope is the continuing surge of remittances by overseas Pakistanis.

The report also maintained that foreign debt servicing is going to pose a serious problem for the country.

The SBP annual rightly concludes that "in the final analysis, all the economic problems can be traced to poor governance. The government economic policies will be ineffective unless they are supported by strong institutions and are consistent with other policies of the government. A cross country comparison shows that institutional weaknesses at all levels of the government: civil services, law enforcing and regulatory bodies and agencies for oversight and accountability, are responsible for poor economic growth."

The report pointed out the business environment has been undermined by institutional weaknesses. In a recent study on the ease of doing business by the World Bank, Pakistan slipped to 105th from 96th position out of 180 countries.

"Out of ten specific topical criteria, Pakistan scored poorly for the availability of electricity (at 166) followed by the citizens who actually pay their taxes (at 156),î the report highlighted and stressed that Pakistan political leadership must take credible steps to stop this slide.

The SBP's report is in fact serving as an eye opener to all concerned specially the incumbent government. After a professional analysis of our collapsing economy, the report has suggested remedies to take the country out of this turmoil.

It has demanded of the government to move quickly to broaden its tax base, restructure of all loss making public entities, and curtail unproductive expenses as far as possible.