KARACHI: The State Bank of Pakistan (SBP) has said that smooth progress on the China-Pakistan Economic Corridor (CPEC)-related projects will ease infrastructure and energy constraints in the country, besides creating demand for industrial output.
The central bank in its annual report on the State of Economy for the year 2015-16, released on Thursday, said that Pakistan’s economy maintained its momentum towards a higher growth trajectory in FY16, as higher infrastructure spending by the government and low interest rates provided a boost to domestic demand. According to the report, improvements in energy supply and the security situation also supported this growth momentum.
It said that economic activity would also benefit from pro-growth policies – the policy rate currently stands at a historic low of 5.75 percent, which has made funding easier for businesses and consumers.
At the same time, the current account deficit was likely to stay in the range of 0.5-1.5 percent of GDP during the year.
In this context, the report draws attention to the International Monetary Fund (IMF) programmes’ contribution to restoring macroeconomic stability and confidence of international creditors.
Crucially, it maintains that the reform process related to energy-sector, loss-making public sector enterprises (like PSM and PIA), and business-friendly regulations must continue after the IMF programmes’ completion. The report reiterates that without private sector participation, it would be hard to achieve a higher and sustainable growth that was built on the pillars of entrepreneurship, innovation and competitiveness.
The report said that with an improved macroeconomic environment, better energy supplies, and subsiding security concerns, business sentiments are upbeat.
Similarly, growing development spending, despite a planned reduction in budget deficit, would continue to support infrastructure-related industries, it said. “Therefore, domestic demand is likely to remain strong, as reflected by leading indicators like credit expansion to businesses, consumer financing, and trade.”
In this backdrop, the government envisages a gross domestic product (GDP) growth of 5.7 percent for FY17 – a sizeable 100 bps rise from the 4.7 percent growth realised in FY16, it said. “The major contributions to this increase are expected to come from a recovery in agriculture sector and further increase in industrial activity; the services sector is envisaged to maintain the growth of the previous year.”
The report further explained that though some macroeconomic indicators were short of targets, they still posted better performance over the last year. For instance, real GDP growth of 4.7 percent during FY16 was below its target, but nevertheless higher than the growth achieved a year earlier. Meanwhile, the accumulation of the country’s foreign exchange reserves reached an all-time high level at the end of FY16; the exchange rate remained stable; and consumer price index (CPI) inflation fell to only 2.9 percent during the year, it said.
Similarly, the report pointed out that fiscal consolidation remained on track, and the budget deficit was reduced to 4.6 percent of the GDP – the lowest since FY 2006-07. Notwithstanding these positive macroeconomic stability gains, the report highlights some challenges as well. “Firstly, the current level of private investments and savings in the country needs acceleration to keep pace with required resources. Secondly, structural issues in the export industry need to be resolved. Thirdly, the reliance of the tax system on stop-gap measures is creating distortions in the economy. Finally, the country needs to spend more on social sector development to address social issues.” The report, however, views Pakistan to be well positioned to address these challenges.