State Bank of Pakistan (SBP) predicts that the real GDP growth is projected to come close to the 6.0 percent target for FY18. This is coupled with expectations of the expansion in economic activity to maintain the momentum. Inflation is also likely to remain within the target, said SBP.
In the annual report “State of Pakistan’s Economy for the fiscal year 2016-17”, the central bank reiterated its prediction of GDP growth between 5 to 6 percent in the current financial year, considering the mixed trends in the macro-economy which includes challenges and opportunities.
The real economic activity is expected to continue to benefit from accommodative macroeconomic policies, activity related to CPEC, and consistently improving domestic energy supply and security situation.
Fiscal and Current Account Deficits
On the flip side, the external and fiscal accounts may remain under pressure. This pressure is coming from likely elevated import demand and increase in public spending, by provincial governments in particular. The increased spending by the government is to complete development projects before the upcoming general elections in the country.
The current account deficit is projected to remain around last year’s level, that is, in the range of 4.0 to 5.0 percent of GDP, SBP report stated.
The FY18 budget envisages fiscal deficit at 4.1 percent of GDP. Achieving this target may be challenging, given the capital spending requirement of the government for completing various projects under CPEC and likely increase in provincial spending during the election year. Moreover, any shortfall in revenue may keep the fiscal deficit close to FY17 level.
Thus, the current account is likely to settle between $4 billion to $5 billion and fiscal deficit will remain between $5 billion to $6 billion.
Growth in Real Sector
The agriculture sector is expected to repeat its performance from last year, with major contribution expected from the crop sector, especially cotton and rice. Notwithstanding a fall in the area under cotton by 12 percent against the target, cotton output is expected to remain higher compared to last year.
The industry (largely LSM, construction and electricity generation and electricity and gas distribution) will continue to benefit from the ongoing work on infrastructure and energy related CPEC projects. Thus, the expected improved performance of the agriculture and industrial sectors will spillover to the services sector in FY18 as well.
With real economic activity gaining further traction, the import demand, both for machinery and raw materials as well as consumer goods, is expected to remain strong during FY18 as well.
Exports and Remittances
On the other hand, growth in exports and workers’ remittances is expected to recover. The exports are expected to benefit from a recovery in global commodity prices and ease in energy constraints. This is particularly indicated by a double-digit growth in exports recorded during the first two months of FY18.
In case of workers’ remittances, the initiatives under PRI could help in attracting more receipts through official channel. The key initiatives includes new products for diaspora, extending the tie-up arrangements as practiced in case of GCC and UK to other sources of remittances like Malaysia, South Africa and New Zealand, and plans to further reduce the cost of fund transfers. Incorporating these developments, workers’ remittances are projected to remain in the range of US$ 19-20 billion during FY17. Yet, the pace of increase in exports and remittances is likely to be slower compared to increase in imports.
Headline Inflation
Notwithstanding the expected increase in domestic demand, the average CPI inflation rate is projected to remain in the range of 4.5 to 5.5 percent during FY18.
Sufficient food stocks (wheat, rice, and sugar) in the country, weak domestic oil prices and a stable exchange rate are expected to offset the impact of further rise in domestic demand.
Moreover, as per IMF projections, the commodity prices, palm oil and sugar, are also likely to fall in the international market over the next few months.
The economy is likely to continue to expand with low and stable inflation in FY18. Encouraging trends in private sector credit indicate underlying dynamics in real economic activity. However, maintaining this momentum going forward would largely depend on addressing emerging challenges in external and fiscal accounts, the report added.
