Growth may remain below 6 percent target

GDP growth will be higher than previous year but is likely to remain slightly below the target of 6 percent at the end of this fiscal year (FY18), mainly due to dismal performance of agricultural sector, said the State Bank of Pakistan (SBP) in its second quarterly report issued Friday.
According to the report, important developments have taken place in the macroeconomic outlook. First, the PKR depreciated by 4.4 percent in December 2017. Second, the Monetary Policy Committee in its 4th policy review of the fiscal year, in January 2018, decided to increase the policy rate, after keeping it unchanged for more than six quarters. The MPC's decision was taken to dispel the possible impact of rising oil prices and PKR depreciation on domestic inflation.
The SBP believed that the switch in the monetary policy stance can potentially induce corporate to practice more conservative leveraging. However, encouragingly though, private credit has recovered strongly from mid-January 2018 onwards, and has increased by Rs 167.9 billion since then. Sugar industry dominated this borrowing spree as they belatedly initiated the sugarcane crushing. Despite this activity, expectations are that the full-year growth in sugar production will remain lower compared to the previous season.
Still, the overall LSM numbers may be stronger than last year on the back of expected buoyancy in consumer durables and construction-allied industries. In contrast, agriculture growth is likely to remain lower than last year, as well as the target set for FY18. This assessment is primarily based on an expected shortfall of 2.5 million bales in cotton production, as well as below-target area under wheat cultivation.
The report said that Pakistan's economy is set to surpass last year's growth rate, with continued strong performances by agriculture and services, and a four-year record high large-scale manufacturing growth during the first half of FY18. However, the GDP growth is likely to remain slightly below the target of 6 percent.
According to the report, the overall fiscal deficit is likely to exceed the target for FY18, despite an improvement in revenue growth, primarily due to the continued momentum in development spending as well as an increase in the debt servicing cost. The overall current expenditures are also likely to remain high because of expected election-related spending.
On the external front, the strengthening demand for imported products in western markets, along with the PKR depreciation and the government's policy support for exporters, are all positive signs.
Following a healthy 16.4 percent growth in the month of February 2018, the cumulative export growth in July-February FY18 has reached 11.7 percent. If exports continue to grow at the same pace for the remaining months, the target of $ 23.1 billion can comfortably be surpassed.
The report pointed out that there has been an uptick in the import growth during February 2018. But it is important to note that almost 62.5 percent of the YoY increase was due to energy products, which basically represented the impact of oil price rally throughout H1-FY18. A higher energy bill, coupled with a steady increase in the import of steel and textile inputs, more than offset a decline in the import of machinery, food items and completely built units of passenger cars during the month, the report pointed out.
Encouragingly, the outlook of global oil prices looks much stable now as the rapid increase in shale production by the US is likely to outweigh the anticipated pick-up in global oil demand. If these expectations materialize, then at least the price component of Pakistan's energy bill may be less of a concern going forward, the SBP said.
From inflation perspective also, the stability in the global oil market will be crucial. Since end-December 2017, the government has increased domestic petrol prices by Rs 11 per litre (13.7 percent) to pass on the impact of the high import cost as well as the PKR depreciation. Though underlying inflation has stabilized, and the headline inflation is low (and falling, as suggested by 4-month low inflation recorded in February 2018), upward pressures coming from fuel costs are hard to ignore, it added.
The report pointed out that increased consumer spending has led to a strong growth in durables such as automobile and electronics, while the ongoing infrastructure and construction activities have stimulated the allied sectors of cement and steel. Encouragingly, various industrial players across different sectors are investing in capacity expansions and product diversification.
The private sector also continued its borrowing from scheduled banks for long-term projects. On the agriculture front, while all major Kharif crops performed well, wheat production came under pressure due to lower area under cultivation.
With adequate inventory of key food items, such as wheat, sugar and pulses, prices of these commodities remained low, keeping food inflation in check.
Favorable adjustment in the duty structure of cigarettes led to a sharp fall in its price. Meanwhile, core inflation remained higher on average in H1-FY18 due to continuously rising education and healthcare costs. However, its pace has stabilized in recent months.
The report highlighted that the growth in revenue collection outpaced the increase in expenditures in H1-FY18, which led to a broad-based improvement in fiscal indicators. The overall fiscal deficit was contained at 2.2 percent of GDP, down from last year's 2.5 percent. Revenue growth gained impetus from greater real economic activity, rising imports (both quantum and prices), and higher sales volumes of POL products.
Non-tax revenues also rose over last year, led by higher SBP profit and a surge in receipts from property and enterprise, civil administration and other miscellaneous receipts, it added.