Economy well poised to achieve 6 percent growth: SBP

The State Bank of Pakistan (SBP) Friday said that prospects for GDP growth remained strong and indicators suggest that the economy is well poised to achieve the target growth of 6 percent for FY18. However, in order to maintain this virtuous equilibrium of high growth and low inflation in the medium- and long-term, the SBP has underlined the need to address long-standing structural reforms in the fiscal and external sectors.
According to SBP''s First Quarterly Report for FY18 on "The State of Pakistan''s Economy" preliminary data on key macroeconomic indicators suggest that growth momentum remained strong in the first quarter of current fiscal year and several coincident indicators point to a further strengthening of aggregate supply and demand in the economy.
Except cotton, other major Kharif crops achieved or surpassed the FY18 targets. While Large-scale Manufacturing clocked in a nine-year high growth rate. With increasing consumer demand, several manufacturers announced new investments. At the same time, infrastructure projects upped their momentum, the report said.
As the exports receipts recorded a broad-based recovery after three years of decline, foreign direct investment inflows posted a nine-year high level. The robust demand also allowed the Federal Board of Revenue (FBR) to achieve the highest tax collection during the last five years.
Moreover, with stable conditions in the money and foreign exchange markets, SBP''s policy stance remained broadly accommodative in the first quarter of FY18 as well. The spread between the policy and actual overnight money market rates further decreased, as the weighted average lending rates also nudged downwards.
According to Report, current developments under CPEC could provide the industrial sector of Pakistan with an opportunity to be more efficient and competitive. While, the direct impact of construction and energy-related projects is often highlighted, more attention is required to the development of Special Economic Zones (SEZs) across the country.
The report also highlighted that the recent significant gains in export growth and foreign direct investment are welcome developments. However, these gains were not enough to contain the overall balance of payments deficit.
On the back of an expanding economy, import payments far exceeded the aforementioned positives and the external sector remained under pressure, it said and added that the widening of current account deficit along with an increase in economic activity is a recurring phenomenon for Pakistan, and one that has the tendency of disrupting growth cycles. There is, hence, an urgent need to find innovative policy mixes, avenues for raising foreign exchange earnings, and realigning policies favoring export growth, the SBP suggested.
As per current projections, rising oil price while exerting an upward pressure on imports would further widen the services deficit through increased transportation cost. Nonetheless, significant base effect and recent imposition of regulatory duties and depreciation of PKR against US$ would likely restrict the import growth during the remainder of FY18. Therefore, the current account deficit projection range remains unchanged.
Furthermore, inflows related to recently launched Sukuk and Eurobond, sharp increases in FDI, and expected CSF inflows would help keep the external sector stable to some extent in FY18. Similarly, fiscal accounts balance may remain under pressure as well because the recent trends show that the performance of tax collection has been as per expectation, development spending is also maintaining the momentum. However, current expenditure has risen significantly.
The past trends suggest that current expenditure usually increases sharply in election year. Containing current expenditure as per announced budget may be challenging going forward. Therefore, even with growth in revenue and development expenditure remaining close to as originally envisaged the fiscal deficit target for FY18 could be missed, the report projected.
From the demand side, rising income levels of consumers are fueling retail sales and commercial activities. Businesses, meanwhile, are in the middle of an expansionary phase, with the international investors'' attention boosting the level of competition and quality in the domestic market. Substantial capacity expansions are already underway cement, steel, automobile, and electronics sectors.
However, fertilizer manufacturers are facing operational constraints in the form of gas diversions, expensive LNG supplies, and build-up of inventories forcing a few of the players to shut down their plants. This would have implications for the industrial as well as the agriculture sector. Also, policy uncertainty regarding furnace oil based power plants further adds to industrial sector challenges especially refineries'' activities.
The SBP has revised export growth projection upwards due to three main reasons. First, while some of the structural headwinds still persist, such as lack of product and market diversification, uninterrupted energy supplies to the manufacturing sector is going to add on to the current growth momentum. Second, improving cyclical factors, such as increasing global demand and commodity prices, is another positive for Pakistani exports. Third, recent exchange rate depreciation is expected to reflect positively on the exports.
According to report financing the deficit proved to be a challenge. While foreign direct investment posted significant YoY growth, foreign investors in the equity market seemed particularly sensitive to brewing uncertainty over the political climate as well as the exchange rate outlook. Consequently, funding the current account deficit led to a decline in the country''s foreign exchange reserves. Specifically, SBP''s foreign exchange reserves declined by $ 2.3 billion during Q1FY18, with the remaining reserves capable of providing cover for nearly three months of the country''s imports, the report added.
The fiscal deficit was 1.2 percent of GDP in Q1FY18; lower than 1.4 percent recorded in the corresponding period of last year. In Q1FY18, the primary balance turned into a surplus while revenue deficit shrank compared to Q1FY17. The former indicates that expenditures excluding interest payments remained contained while the latter reflects that growth in revenue collection outpaced growth in current expenditures. Total revenue recovered strongly; showing 18.9 percent increase in Q1FY18 against 8.0 percent decline recorded in the same period last year.