KARACHI, Dec 6: The State Bank of Pakistan in its annual report has pinned high hopes on implementation of macroeconomic stabilisation package, endorsed by the International Monetary Fund to bring down galloping inflation and recreate an economic environment conducive for investment.

The thrust of policy recommendations, however, seems to favour stabilisation over growth. There is no signal to suggest easing out of the monetary policy by bringing interest rates down in the near future despite what the report called, ‘moderation of growth rate’ in the country.

The report refuted the argument that the tight monetary policy is stifling growth by discouraging investment demand.

The report avoided raising questions about the development model being followed in the country that has often being criticised for its weak foundation.

The report attributed the abrupt downturn in the key economic indicators, such as inflation and twin deficits to certain indigenous and exogenous factors.

“Pakistan’s economic growth moderated to 5.8 per cent in FY08 (well below the target of 7.2 per cent) due to a combination of domestic (e.g. energy shortages, some disappointing crop harvests, and rising political uncertainty) and external factors (including a rise in international commodity prices and lower capital inflows).”

The language of the report is diplomatic. It, however, blames the government’s mismanagement repeatedly for bringing the country at the current pass.

The period under review includes FY07-08 and the first quarter of the FY08-09. So the commentary is on the performance of both Musharraf/Aziz government and the current Zardari/Gilani post-February elections government.

The report specifically mentions mindless borrowing by the government to finance limitless spending for creating crucial economic imbalances.

“Fiscal management weaknesses surfaced more glaringly as budget for 2007-08 was observed to be grossly underestimated and spending was not aligned properly to resource availability.

The structural weakness has been inherent given stagnant tax/GDP ratio for some years, the fiscal gap rose as the country had to bear higher than budgeted interest and subsidies expenses that together rose to 8.4 per cent of the GDP.”

It blamed macroeconomic imbalances that also include trade deficit for the significant drawdown of the foreign exchange reserves which declined drastically to reach $6.4 billion in November 08 from … in November 07. This led rupee to shed 23 per cent in value.

The report defended the tight monetary policy stance of the central bank that it explained was required to rope in inflation. It also blamed the market manipulators for creating artificial shortages of edibles to cash on the situation.

It blamed lack of consistency in monetary and fiscal response for the delay in realisation of intended results.

It advocates policies to bring about increase in tax-to-GDP ratio and press for containment in non-productive expenditure of the government.

It emphasises the need for increasing exports through diversification of products and markets and curtailment in imports through aggregate demand management.

A weak attempt has been made in the opening section to give hope to the stake-holders by avoiding the reference to the performance of economy on the year under review.

Instead the high growth phase FY04-07 has been projected as a testimony of the potential of the country to deliver above seven per cent growth rate.

The future economic prospects of Pakistan rest to a great extent on the fiscal conduct of the government and its capability to put the right set of policies in place to encourage investment in the real sector.

The detailed report is available on SBP’s website.