The Monetary Policy Committee of State Bank of Pakistan (SBP) has decided to keep the policy rate at 5.75% for the next two months. This is the tenth time when the policy rates have been kept stable at the same rate for twenty months.
The decision was made on the basis of latest information that economic activity is strong, as corroborated by broad-based pick-up in industrial output, gains in factors supporting production of major crops and growth in private sector credit.
This implies that the prospects of achieving 6.0 percent target of real GDP growth continue to be strong.
Welcome Macroeconomic Indicators
A review of latest developments in the real sector shows that during Q1-FY18, LSM growth surpassed its earlier expectations as it has been recorded at 8.4 percent compared to 1.8 percent in the corresponding period of FY17.
This is explained by improved security conditions and power supply, transformation of fixed investment into enhancements of productive capacity on the ground, low inflation and stable interest rates. Further support comes from the continuation of CPEC projects.
Barring any extreme seasonal events, agriculture sector is expected to perform better for the second consecutive year. This is explained by increase in both cultivated area and fertilizer off-take during the Kharif season, on-going trend of investment in mechanization, higher uptick in agricultural credit and unchanged support price for wheat at the time of its sowing.
On the fiscal front, healthy growth in tax revenue collection by FBR during Q1-FY18, 22.0 percent compared to the modest 4.5 percent during Q1-FY17, is a welcome development.
Finally, the financial account perspective shows that FDI inflows have risen, reaching US$ 940 million by the end of October FY18 as compared to US$ 539 million during the same period last year, indicating improving sentiments regarding the economy.
Taking all the evidence together, real GDP growth is expected to meet its target level during FY18.
Challenges to Economy
Near-term balance-of-payments challenges continue to persist though visible improvements in export growth, notable increase in foreign direct investments and expected other financial inflows may help contain these pressures.
The current account deficit widened to US$ 5.0 billion during Jul-Oct FY18 as compared to US$ 2.3 billion during the corresponding period in FY17.
Delving deeper, Pakistan’s exports have seen an improvement during Jul-Oct FY18, growing 11.3 percent as compared to the decline of 3.1 percent in the comparable period last year. Similarly, remittances recorded a modest increase of 2.3 percent during Jul-Oct FY18.
The impact of these positive developments on the overall current account was more than offset by growth in imports on account of rising domestic demand for consumption as well as investment and due to recent rise in international oil prices. However, the introduction of regulatory duties is expected to help curb imports during the coming months.
Higher international oil prices along with pass-through to domestic petroleum prices and the imposition of regulatory duty on non-essential import items are expected to increase inflation in the coming months. Inflation is still expected to fall inside the range of 4.5-5.5 percent projected at the start of FY18.
One of the challenges to economy is that SBP’s foreign exchange reserves stand at US$ 13.5 billion on November 17, 2017 down from US$ 16.1 billion at end-June 2017.
Going forward, progress on CPEC related projects and other official proceeds will be instrumental in managing the overall balance-of-payments deficit.