SBP Governor s view of the economy

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SBP Diary - SBP News

EDITORIAL  : State Bank s analysis of the economy is generally comprehensive and realistic but what its Governor, Salim Raza said at the inaugural session of Punjab Investment Conference on 3rd May was pretty ordinary. Stressing the point that the country had come a long way from a near-financial crisis during 2008, he asserted that we can look at moving ahead to make the recovery of growth the main priority .

GDP growth was very low last year but could increase to 3.5 percent this year and 4.5 percent during 2010-11. However, to achieve sustainable base rates of 6 percent plus we would need to concentrate on our medium-term policy priorities; the critical ones are making a reality of our goals for significantly higher tax collection, addressing power shortages, and then on establishing courses of action to encourage both the quantum and the structure of investment that would make high growth sustainable. In the immediate future, however, the power situation needs improvement and stubborn inflation needs to be checked. Some effective decisions taken by the Prime Minister and chief ministers concerning energy conservation, governance, load management and fresh generation should make a significant dent in the power shortages in the near future.Governor was unhappy about the lack of proper infrastructure in the country. The country needs to spend 6 percent to 8 percent of GDP on infrastructure to sustain a 7 percent GDP growth rate but we spend less than a third of that, the Governor lamented. Major public-private partnership programmes cannot really gain scale and momentum in the absence of a substantial financing institution.

It was against this background that the State Bank had drawn up a blueprint of the type of infrastructure financing institution the country needs, which was developed after review of the structure and track record of similar institutions in leading developing countries. It was expected that the country would have the new institution in the course of next year.

We feel that SBP Governor s observations about the state of the economy at the Punjab Investment Conference would hardly be noticed by anybody, not because these are erroneous but due to the fact that these have been repeated umpteen times and the remedies prescribed for the ailing economy are not likely to be dispensed, at least, in the near future.

At best, such an address could be treated as a routine affair, just to fill a spot by a dignitary at hand. For instance, everybody knows that if the growth rate of the economy is to be enhanced to about 7 percent on a sustainable basis, tax collections have to be increased significantly, power shortages have to be addressed and action has to be taken to increase the quantum of investment.

The real problem is that while all of this is known, authorities of the country, both past and present, have, more or less, been unable to muster the courage to remove these bottlenecks for the larger economic interest of the country. Even the problem of energy shortages which can obviously sink the country to new lows has not been given the attention that it deserves.

Energy conservation measures mentioned by the Governor would only make a marginal difference to fill the huge gap between supply and demand. Amazingly, the supply side has been almost totally ignored for a long time and even now there are no practical and sustainable solutions in hand to resolve the problem on a lasting basis.

The latest news on the subject is the import of 1000 MW electricity from
Iran that would take about 5 years or so to materialise. However, going by the experience of gas pipeline from Iran, such a project could take decades to be initiated. The establishment of a financial institution for the development of infrastructure would be a classic example of a grandiose project that was ill-conceived. It is always better to think about institutions for what they are actually worth for.

Who could know better than the State Bank that financial institutions are intermediaries between savers and investors and their efficiency can only facilitate and contribute partly to overall economic development of the country. The main problem in Pakistan is not the setting up of financial institutions exclusively for infrastructural development - a role that can even be easily assumed by the existing financial institutions, but the dismal saving rate in the country which is biggest constraint for any kind of investment.

In our view, it would be much better for the State Bank to concentrate on the later aspect of the problem by ensuring a positive yield to the depositors through a reduction in the rate of spread of the banking system and lowering inflation. The movement in this direction would increase the saving rate and deepen, diversify and extend the role of the financial institutions automatically.

Governor has mentioned the experience of other leading countries but their economies were able to generate a much higher level of savings, waiting to be captured and utilised for important projects. Depending on foreign funding for the working of such an institution would not be prudent due to the crushing debt servicing burden already being borne by the budget and external sector of the country.


Courtesy: Business Recorder


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