The second quarterly report for FY18 on the state of Pakistan’s economy released by the State Bank of Pakistan on 6th April, 2018 contains a comprehensive assessment of country’s economy. According to the report, prospects for Pakistan’s economy surpassing last year’s growth rate appear strong, with continued healthy performance by agriculture and services sectors, and a four-year record high LSM growth during the first half of FY18. Inflation remained low and fiscal position consolidated on the back of a rebound in revenue collection. However, “risks to overall macro-economic stability have increased due to widening imbalances in country’s balance of payments”.
GDP growth was expected to surpass last year’s decade-high growth rate of 5.3 percent. The performance of agriculture and industrial sectors was encouraging. Services sector was expected to match last year’s impressive performance while wholesale subsector was off to a healthy start due to improved performance of the commodity producing sectors and the increasing import quantum. Food inflation had kept the overall inflation low despite pressures arising from consumer spending and higher oil prices in the country. Core inflation, however, remained higher on average in H1-FY18 compared to the same period last year due to continuous increase in education and health costs. The slowdown in private sector credit caused a significant deceleration in NDA of the banking system. In overall terms, broad money supply (M2) witnessed a 9-year low expansion of Rs.336.4 billion during H1-FY18 compared to an increase of Rs.645.9 billion in the corresponding period last year. The growth in revenue collection outpaced the increase in expenditures during the first half of 2017-18. The overall fiscal deficit was contained at 2.2 percent of GDP, down from last year’s level of 2.5 percent. The growth in revenue collection was broad-based, reflected in both direct and indirect taxes. Notwithstanding the lower fiscal deficit, public debt increased by Rs.1.4 trillion during H1-FY18, significantly higher than the increase observed in the corresponding period of FY17. Major increase came from external component caused by higher external borrowings, revaluation losses due to PKR depreciation and appreciation of other currencies against the US dollar. The report notes particularly that external sector was a cause of concern from the macroeconomic stability viewpoint. Despite the recovery in exports, Pakistan’s balance of payments continued to reel under the pressure of surging imports. The C/A deficit increased to dollar 7.9 billion in H1-FY18 from dollar 4.7 billion in the same period of last year. Higher financial inflows proved insufficient to rein in the decline in country’s foreign exchange reserves.
As for the outlook for FY18, GDP growth is likely to remain slightly below the target of 6.0 percent. On the external front, if exports continue to grow at the same pace for the remaining months of the year, the target of dollar 23.1 billion can be surpassed. On the import side, a higher energy bill coupled with a steady increase in import of steel and textile inputs could more than offset a decline in the import of machinery, food items and completely built units of passenger cars. From inflation perspective, the stability in the global oil market will be crucial and upward pressures coming from fuel costs would be hard to ignore.
The State Bank is famous for its objective analysis of the economy and the present report is no exception. It has adopted a balanced approach and not tried to give a positive spin to various indicators. It is good to see that the growth rate is likely to surpass the previous year’s level and is going to be only slightly less than the target of 6.0. Not only will such a growth rate increase employment opportunities in the economy, it will also help raise the standard of living if population growth rate can be contained at lower level. Another positive development was that the GDP growth rate seems to have originated from all the sectors, thus spreading the benefits of growth across most of the sections of society. The overall inflation rate was significantly lower than the target of 6.0 percent due to very low level of food inflation and this was also a good news because the poor people spend a large part of their incomes on food items. The SBP has pointed out that some uptick in inflation could not be ruled out due to depreciation of the rupee and increasing demand. However, the rate of inflation could be contained within reasonable limits through contractionary fiscal and monetary policies. Encouragingly, overall fiscal deficit was contained at 2.2 percent of GDP, down from last year’s level of 2.5 percent and both revenue and primary deficits declined from 0.8 percent and 0.5 percent of GDP last year to 0.4 percent and 0.1 percent, respectively, this year which would augur well for price stability. The SBP also seems to be aware of the need of appropriate monetary policy approach. It is, therefore, prepared to increase the policy rate, whenever required. The sharp increase in public debt is of course a very negative development, especially when the external indebtedness of the country is rising at a very fast rate and the long-term domestic debt is converted into short-term instruments. Such a consistent increase in public debt should be avoided at all costs due to a number of risks involved in adopting this policy strategy.
The most worrying development, however, is the sharp and continuous increase in C/A deficit and the resultant decline in foreign exchange reserves held by the SBP. The present PML(N) government has taken note of this worsening situation with a great delay and adopted certain measures like imposition/increase in the duty of non-essential imports, depreciation of the rupee, and announcement of the amnesty scheme to reverse the trend. The impact of these measures would only be evident after a time lag. Such a risky situation in the external sector would not have developed if Ishaq Dar, the previous Finance Minister, instead of relying on foreign expensive loans, would have taken timely measures to correct the situation. Anyhow, the present report is likely to enhance the credibility of SBP and serve to improve the awareness level of the public and parliamentarians about the various economic issues facing the country at present.
