Daily Times

KARACHI: The State Bank of Pakistan (SBP) while terming the real GDP growth target of 6.2 per cent for fiscal year 2108-19 (FY19) ambitious has projected that the real GDP growth of Pakistan in the ongoing fiscal will stay around 4.7 to 5.2 per cent.

In annual report on the state of Pakistan’s economy for the fiscal year 2017-18 released on Thursday, the SBP stated that the recent policy measures and developments including monetary tightening, exchange rate depreciation and changes in import and custom duties are all likely to dampen domestic demand, especially the imports. The additional revenue measures and a cut in federal development spending proposed in the Finance Supplementary (Amendment) Bill, 2018, might contain fiscal deficit as well. However, these developments will have implications on growth and inflation may increase.

The report said industrial sector, in particular, may witness a slowdown due to an expected reduction in consumer demand. “Construction-allied and consumer durable industries may see slower growth in production.

Moreover, lower sugar production on account of expected decline in sugarcane crop may also dampen the food group’s contribution to LSM growth,” it said. “Decline in the area under sugarcane crop, water shortages at the time of sowing of kharif crops, especially cotton, and weak trends in the off-take of fertilizer indicate that agriculture sector may not repeat last year’s extraordinary performance,” it added.

The SBP said recent rains and improved water availability as well as increased area under rice and cotton crops, however, may provide some support. “Therefore, growth in agriculture may fall below the target as well as the last year’s level of 3.8 per cent. Slower growth in both industrial and agriculture sectors will also affect performance of the services sector. In this background, the real GDP growth is projected in the range of 4.7 to 5.2 percent during FY19,” according to the SBP.

In addition to slower economic activity, exchange rate depreciation and other administrative measures, especially increase in import duties, would help moderate growth in imports barring any major shock to international oil prices, the report said. “Exports are expected to maintain the FY18 momentum into FY19 as well, though uncertainties due to growing global trade tensions could pose some downside risks to this momentum,” it added.

“Besides the lagged impact of depreciation, improved energy supply, better availability of raw materials (especially cotton, rice and hides), and continuation of the incentive package for export-oriented industries are the key factors supporting prospects of higher growth in exports,” the report said. “In addition, Pakistan can also benefit from a likely increase in food prices in international market. Persistence of drought-like conditions in major wheat producing countries could lead to higher wheat prices, increasing prospects for Pakistan to offload surplus wheat stock,” it added.

According to the SBP, workers’ remittances are expected to increase moderately during FY19 on account of an up-tick in international oil prices, steady economic activity in advanced economies, and various steps taken to facilitate remittances through official channels like m-wallet and asan remittance account. Incorporating these developments, the SBP projected that current account deficit will be in the range of 5 to 6 percent of GDP for FY19.

The reduction in development spending and austerity measures are likely to relatively slower the growth in overall fiscal spending, the central bank said, adding that these measures are expected to contain the fiscal deficit in the range of 5 to 6 percent of GDP during FY19. “The overall assessment, therefore, suggests that underlying inflationary pressures may persist. Increase in gas tariffs, import duties and excise duty would further add to inflation both directly and indirectly,” the report maintained.

“Moreover, pass-through of higher oil prices and exchange rate depreciation would keep inflation expectations high. Some of the impact of these factors, however, is likely to be offset by the increase in policy rate and lower food inflation, which is expected to remain subdued in FY19 as well in view of sufficient stocks of staple food items,” the report said, adding, “With these developments in the background, average inflation is projected in the range of 6.5 to 7.5 percent during FY19, against 3.9 percent recorded in FY18 and 6.0 percent target for the year.”

Published in Daily Times, October 19^th 2018.