Pakistan Will Miss Its GDP Target But Will Finally Achieve Economic Stability: SBP

State Bank of Pakistan (SBP) has projected that Pakistan’s GDP will grow between 4 and 4.5 percent in the financial year of 2018-19 whereas the target of 6.2 percent for real GDP growth seems unachievable.

The country’s GDP growth rate is not sustainable again as it will go down to 4 percent in the current financial year after touching a 13-year high growth rate in the immediate closing financial year 2017-18.

Adversely, the GDP growth will go down, the inflation rate will remain high to settle between 6.5 to 7.5 percent by the end of the financial year, said a quarterly report of SBP “The State of Pakistan’s Economy.” The impact of revisions in gas tariffs and the second-round impact of exchange rate depreciation will take a toll on high inflation.

Besides, macroeconomic indicators like current account deficit and fiscal deficit are likely to stabilize with marked improvement.

SBP predicted that the current account deficit will settle between 4.5 % to $5.5% of the GDP in the current financial year. On the other hand, the fiscal deficit is projected in the range of 5.5% billion to 6.5% of the GDP in the current financial year.

The central bank projected a little higher import bill of $56 to $57 billion this year. Last year, the import bill swelled to $55 billion.

Some good new developments are that the central bank projected that remittance inflows and exports receipts will increase to all-time high. Remittance inflows will grow in the range of $20.5 billion and $21.5 billion and exports will grow to about $27 billion to $28 billion by the end of the current financial year.

In a nutshell, the policy environment through the rest of the year is likely to center around achieving macroeconomic stability.

Factors For Low GDP Growth

Kharif crops have already underperformed, and given the persistent water shortages across the country, the overall crop sector is unlikely to rebound during the rest of the year. Therefore, the overall contribution of agriculture in GDP growth will largely depend upon the performance of the livestock sub-sector.

Similarly, in the case of LSM, the construction-allied industries will continue to give a subdued performance as the government is likely to contain its development spending. Consumer industries will also feel the brunt of reduced demand, as purchasing powers are hit by rising inflation, increasing interest rates, and adverse currency movements.

As for the external sector, the most important development has been the bearish spell in the global crude market that began in early October and ran through the rest of Q2-FY19. Oil prices have fallen by a quarter during this period and reached a year-low level of US$ 54 per barrel. This will lift some pressure from Pakistan’s oil import bill in at least the second quarter of the year.

SBP has already increased the policy rate by another 150 bps in November 2018, in order to check inflationary pressures and rising inflationary expectations.

Similarly, fiscal policy has been recalibrated to work in tandem with the stabilization objective since the formation of the new government. In particular, it has cut budgeted development expenditures for FY19 and has partially reversed the tax relief measures that were announced earlier as these measures had contributed to lower revenue mobilization during Q1-FY19.

In the case of non-energy imports, the current slowdown may continue going forward amidst weakening domestic economic activity, exchange rate depreciation and an increase in import duties.

 Exports may gain from exchange rate depreciation and an increase in consumer spending in the advanced economies, but their momentum could possibly be weakened by rising cost pressures. Still, the estimates for overall foreign exchange earnings are on the higher side, as workers’ remittances are projected to sustain high growth. Resultantly, the overall current account deficit is expected to narrow down to 4.5-5.5 percent of GDP, from 6.1 percent in FY18.

Financing of the current account might improve going forward as there is an expectation of receiving higher foreign exchange inflows from both private and official sources during the second half of FY19. In particular, recent bilateral arrangements, including the deferred oil payments facility, are likely to be available from January 2019 onwards.

Not only would this bolster the country’s foreign exchange reserves, but also ease pressures in the domestic foreign exchange market. Thus, continuing with a right mix of policies and sufficient Balance of Payment support, the country is expected to revert to a stable macroeconomic environment over the medium term.

Future Outlook

While the efforts are underway to regain macroeconomic stability, the concurrent progress towards reforms is welcome. It is now important to deepen and accelerate the pace of reforms within the fiscal and energy sectors, and also spread the process across other sectors of the economy.

The objective should be to rationalize the economy’s incentive structure; enhance ease of doing business via embracing technology and simplifying procedures; and improve public financial management and governance. Putting right policies in place is critical, even if it takes time, to get the economy out of the boom and bust cycle. This is important also to benefit on the productivity front, in order to push the growth momentum forward.

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