State Bank of Pakistan (SBP) indicated that the economy could not sustain the growth rate in the starting financial year 2018-19. This is mainly due to the various weakening indicators of macro-economy, which have been overshadowing the record achievements of economic prosperity during the past few years.
In the quarterly report “The State of Pakistan’s Economy”, the central bank presented its overview that the improved economic growth of the country came amid widening twin deficits, which pose challenges for sustainability of the growth momentum.
The government has set a 6.2 percent real GDP growth target for FY19 largely on the back of accelerating growth momentum of the last few years. The growing external vulnerability and high fiscal deficit will continue to pose major down side risks to the achievement of this target, it said.
Moreover, on the real side, the ongoing dry spell and water shortages may adversely impact the value addition potential of the agriculture sector. High domestic demand, lagged impact of adjustment in energy prices, and PKR depreciation are likely to contribute to higher CPI inflation in FY19.
Smooth supply of staple food items and soft oil price on the other hand could offset these underlying pressures and help keep inflation around the target of 6 percent set for FY19.
It is pertinent to mention that the government has set fiscal deficit target at 4.9 percent of GDP for FY19, which is based on a 12.7 percent anticipated growth in FBR tax revenues and a 10.0 percent increase in expenditures, with greater emphasis on current expenditure.
Achieving the fiscal deficit target in this backdrop appears challenging as the recent budget has reduced tax rates without rationalizing expenditure.
On the external side, the exports growth prospects remains encouraging on the back of Rupee depreciation; recovery in global demand; fiscal incentives for exports; ease in power supply; and improved price outlook of rice and cotton in the international markets.
Also, the growth in workers’ remittances is expected to further gather some pace, partly on account of the steps taken by the government and SBP to attract inflows through the official channels. At the same time, a deceleration in imports is expected due to proactive monetary management by SBP, Rupee depreciation and the continuation of administrative measures to dampen the domestic demand for non-essential import items.
On the other hand, the import bill is likely to stay high owing to a notable increase in international commodity prices, especially of oil. This would keep the trade deficit high in FY19 as well.
Furthermore, the FDI inflows are expected to remain lower in FY19 than last year as a number of CPEC energy projects are in their advance stages of completion. Therefore, in overall terms, the high current account deficit, together with limited financial inflows, would continue to keep the balance of payments under pressure.
Higher PSDP and CPEC spending, a further ease in power supply, and continuation of industrial expansion plans, are other reassuring factors.
Review of Year 2017-18
The real GDP maintained its upward trajectory, exhibiting a 13-year high growth of 5.8 percent in FY18. Benign inflationary environment and improved law and order situation boosted business sentiments, resulting in higher credit offtake especially for fixed investment.
However, this improved economic growth came amid widening twin deficits, which pose challenges for sustainability of the growth momentum, noted SBP’s Third Quarterly Report on The State of Pakistan’s Economy.
The report pointed out that improvement in the crops sub-sector, especially cotton and sugarcane, paved the way for agriculture to surpass last year’s performance. Noteworthy contributions from construction- allied industries owing to CPEC and PSDP resulted in a 10-year high growth of the industrial sector. In particular, better performance of large-scale manufacturing activity was supported by robust domestic demand, improved business environment and capacity expansions in some of the industries. Strong activity in the commodity-producing sectors also led to the services sector maintaining its growth momentum.
The report cited that sufficient supply of key food items, such as wheat, sugar and rice, resulted in subdued food inflation, which helped to partially offset the higher non-food inflation. The report also observed that the effects of Rupee depreciation on inflation came into play during Q3-FY18. As inflationary expectations shored up, SBP increased the policy rate in January 2018.
On the external front, the report noted that despite a recovery in exports and remittances, a rebound in global oil prices, and higher transport and machinery imports led to a current account deficit of US$ 12.1 billion – the highest seen during Jul-Mar of a fiscal year. Even though financial inflows were higher in Jul-Mar FY18 than last year, they were still insufficient to finance the current account deficit. Resultantly, SBP reserves dropped to US$ 11.6 billion by end-March, and the PKR depreciated by 9.6 percent cumulatively during Jul-Mar FY18.
In sum, the sustainability of current growth momentum rests on effectively managing the internal and external gaps. On the external front, there is a need to arrange external financing in the short-term, and resolve structural issues affecting competitiveness in the medium and long term. On the fiscal side, the rationalizing of expenditures may help reduce some stress temporarily, the reforms are needed to expand the tax base and enhance the efficiency of the tax system to put the internal finances in order