RIZWAN BHATTI
KARACHI: The State Bank of Pakistan (SBP) is expecting that GDP growth will further strengthen during this year as the initial assessment indicates the economy is moving on its growth trajectory, amid some challenges.
According to SBP’s first quarterly report, the State of Pakistan’s Economy, released on Friday, after achieving a growth rate of 4.7 percent in FY16, the real GDP growth target for FY17 was set at 5.7 percent and a higher growth is expected to be driven by a rebound in agriculture and an enhanced contribution from industry.
“The preliminary data is indicating that the real economic activities are expected to maintain their momentum. Specifically, the higher production of cotton, sugarcane and maize crops is encouraging. Moreover, better supplies of minor crops also signal some recovery in the agriculture growth,” the report said.
However, SBP said the role of well-integrated and coherent trade and fiscal policies cannot be overemphasized; the overall performance of the economy will depend on how the private sector responds to the existing policy support offered by the government.
While the government has announced several fiscal incentives in the FY17 budget, SBP has been maintaining a historic low interest rate. In this backdrop, the private businesses have an opportunity to demonstrate that they can compete with their peers in other emerging markets and contribute to the growth momentum of Pakistan’s economy.
In agriculture, sugarcane and maize harvests (accounting for 14.6 percent of the crop sector) are expected to reach record levels in FY17. Furthermore, though the cotton production missed the target of 14.1 million bales by a significant margin, it is still higher than the last year’s level. It is expected that a better crop performance would provide a boost to wholesale and retail trade– the largest subsector in services, it added.
While acknowledging the subdued performance by large-scale manufacturing (LSM) in Q1-FY17, the report expected that the growth would gain some pace going forward, on the back of supporting policies and encouraging outlook for automobile, sugar, pharmaceuticals and construction-related sectors.
According to the report, the large retirement of private sector credit in Q1-FY17 was commensurate with an extraordinary off-take during the month of June 2016. Moreover, a few large corporates also remained shy from borrowing despite the historic low interest rates. A positive development, however, was the higher loan demand for fixed investment purposes, particularly for energy-related capital expenditures.
The report highlighted the increase in fiscal and current account deficits in the first quarter, and pointed out that this YoY increase was driven primarily by the absence of inflows under Coalition Support Fund (CSF). In case of the current account, additional pressure came from a widening trade deficit (with rising imports and declining exports) and a fall in workers’ remittances - the first such decline in the past 14 quarters.
On fiscal side, the report noted that the decline in non-tax revenues and lower than expected tax collections, contributed towards a rise in the deficit during Q1-FY17. However, the report appreciated the marginal decline in current expenditures following the cut down in subsidies by the government. Interest payments remained unchanged as the gains realized from low interest rates were largely offset by an accumulation of public debt stock. Furthermore, the report also positively views the increase of 12.4 percent YoY in development expenditures, especially by provinces that scaled up their infrastructure spending during the quarter.
The report reiterated the role of private businesses for higher growth. In particular, fiscal incentives announced by the government in the FY17 budget and a historic low policy rate offer private businesses an opportunity to demonstrate that they can compete with their peers in other emerging markets and contribute to the growth momentum of Pakistan’s economy.
Focusing on imports, the non-oil import bill increased sharply during Q1-FY17, mainly due to higher import of machinery (power generation, electrical and construction) on the back of CPEC-related activities. The overall imports, however, benefited from a significant decline in oil payments during the quarter. This highlights the exposure of the country’s external sector to global commodity prices.
Thus, the external debt of public sector increased by US$ 1.0 billion and reached US$ 58.8 billion by end-September 2016. As mentioned earlier, this rise came mainly due to long-term commercial loans of US$ 700 million (from China). The government also made a net retirement of US$ 315 million short-term commercial loans during the quarter. The substitution of short-term loans with long-term debt would improve the maturity profile of the external debt.
The overall stock of public debt increased by Rs 866.1 billion in Q1-FY17, with over 85 percent of the incremental debt contributed by government borrowings from domestic sources. While a part of this additional debt funded the fiscal deficit of Rs 438 billion for Q1-FY17, the rest of the amount led to a buildup of government deposits with the banking system.
