KARACHI: The State Bank of Pakistan’s recently published Annual Report, highlighted that countries prioritizing growth at the expense of price and financial stability do not achieve sustained economic growth. Rather what follows is a repeated boom-bust cycle.
The report also indicated that “international experience has shown that price stability is a necessary condition for sustained growth and development.” It added that countries with price stability as a primary objective tend to have lower inflation, as well as less volatility in both inflation and growth. The Pakistani government has failed to achieve any one of these targets despite sacrificing the growth.
The present government avoided focusing on growth for the fiscal year FY23. As a consequence a steep fall in the growth ensues. But, even then it remains unsuccessful in bringing price stability along with financial stability.
Despite focusing on prices, inflation for the last five months is hovering around 25pc, worsening prospects for stability and growth. For trade and industries, it is hard to survive under the priorities focused more on prices and less on growth.
Earlier, the SBP estimated growth in FY23 lower than the 3-4pc, a low range set for the year. While it avoided providing a new range, but international credit rating agencies have been predicting it to hover around 2pc.
The sharp fall in growth has already resulted in massive lay-offs from trade and industrial sectors. Another big spell of retrenchments is in the pipeline. Textile millers, exporters and importers have been expressing grave concerns over non-opening of LCs that has crippled the business cycle.
The Government’s medium-term inflation target of 5-7pc is reflective of SBP’s price stability objective. Supply-side factors, such as changes in the price of energy and food, can be driven by both domestic and international developments. These factors can often be difficult to predict, said the report.
In forecasting the inflation, a number of assumptions have to be made and continually updated as more information comes in. It said that inflation forecasts also hinge on the outlook for international commodity prices and exchange rate developments.
“In Pakistan, the coverage and timeliness of information needs improvement. There are often large revisions to ‘annual’ GDP growth estimates relative to provisional estimates. These, together with scarce availability of high frequency real sector data, complicate forecasting and real-time decision making,” read the SBP report.
If price stability is the main objective of the central bank, shifting to a market determined exchange rate is akin to shifting the nominal anchor from the exchange rate to an inflation target. It is around which economic players are may center their expectation and decisions, said the report.
“This requires the central bank to ‘credibly’ commit to deliver an inflation target,” according to the document.
