FY13: SBP sees up to 4pc growth

RECORDER REPORT

KARACHI: The State Bank of Pakistan has said that the outlook for the economy is strongly influenced by the perceived vulnerabilities in the external sector and the country is likely to achieve a GDP growth rate of upto 4 percent against the target of 4.3 percent for FY13.

Structural problems in Pakistan's economy persist and manifestations such as the debt trap, loss-making Public Sector Enterprises (PSEs) and a narrow tax base, will continue to challenge policymakers.

According to first and second quarterly reports for FY13 on "The State of the Economy Pakistan," released by SBP on Saturday, some of the positive developments experienced by the economy in the first quarter of FY13 could not be sustained during the second quarter.

The reports said that by end of the first quarter of FY13, most of the country's macro indicators did show some improvement as headline CPI inflation was on fall, the current account had posted a surplus and the fiscal deficit remained at par with the corresponding quarter of FY12.

While, in the second quarter of the current fiscal year, these macro indicators not performed well and although the current account still posted a surplus in the first half of FY13, however the second quarter posted a deficit. While the downward trend in inflation in the first five months of FY13 appears to have halted in December and the federal government sharply increased its reliance on SBP financing to fund its fiscal deficit, they added.

Without concrete steps to address the energy shortage, the losses of PSEs and generate additional tax revenues; the private sector will remain reluctant to take up the challenge of driving the country's economic growth, they added.

"With growing resource needs to finance the government's day-to-day operations (eg, debt servicing), SBP is less optimistic that much-needed structural reforms of PSEs and the energy sector, will take place in FY13," the reports noted.

With provincial surplus above the full year target, SBP sees growing fiscal pressures for the remaining part of FY13. "Although spending patterns may ease somewhat during the next caretaker government, non-discretionary spending could push the fiscal gap to within 6.5 to 7.5 percent of GDP for FY13 compared to target of 4.7 percent," the reports projected.

Although SBP still feels the average inflation rate for the year will remain in the range of 8 to 9 percent, the momentum for this change can be traced to wheat support prices announced in November 2012, while the recent weakening of the Rupee could add to inflationary expectations, they pointed out.

Supplementing this change in sentiments is the growth of reserve money, which posted an increase of 11.0 percent in H1-FY13, against 5.8 percent in the corresponding period last year the report said and added that the increase in this year was driven almost entirely by government borrowing, they added.

The real sector is showing a mixed picture. Within agriculture, both cotton and rice crops remained below target, whereas sugarcane performed well. The wheat crop is likely to be below target despite the increase in support prices in November 2012.

Pakistan's manufacturing sector on the other hand has posted an improvement, and is likely to continue with this trend. Heavyweights like POL and steel manufacturing have shown strong growth. In addition, allied sub-sectors that support construction activities have shown consistent growth, reflecting strong construction since FY12, the reports said.

Despite these negatives, the resilience of the informal sector appears to be pushing the formal economy forward. Construction activities remain strong, and there are indications of foreign interest in joint-projects in Pakistan's real estate sector as some large local entities have embarked on ambitious residential projects across the country, are beginning to attract overseas interest, they added.

"Construction activities are helping large-scale manufacturing, which could counter the weather-driven losses in the agricultural sector. SBP also see the increase in lending to private businesses as positive, which is likely to gain momentum during the rest of the year," the report mentioned.

In the remaining part of FY13, SBP is not expecting pressure from Pakistan's trade account as it believed that soft commodity prices and strong remittances, should keep the current account contained within 1 percent of GDP deficit. "If key commodity prices remain soft in the second half of FY13, even a current account surplus is possible," the reports said.

However, intangibles appear to be dominating Pakistan's economic outlook. With a caretaker government paving the way for general elections in May 2013, domestic investors are understandably reluctant to take a long-term view, reports mentioned.

So while this uncertainty cannot be denied, the government must prioritise addressing stubborn structural problems in public sector enterprises and the energy sector; similarly, concrete steps are required to enhance revenue collection in an equitable manner, the reports added.

As in the first quarter, bank lending to the private sector does not appear to have picked-up much. However, headline numbers can be misleading: compared to H1-FY12 when credit to the private sector increased by Rs 194 billion, the first half of this fiscal year only posted a net expansion of Rs 105 billion, the reports said and added "this fall is driven by commercial bank lending to non-bank financial institutions (NBFIs), which saw a net retirement of Rs 78 billion in the first half of FY13, probably on account of recent changes in the tax rules."

In terms of federal government borrowing, the aggregated numbers show the government has borrowed less from the banking system this fiscal year, but there has been a sharp shift away from commercial banks to SBP during Q2-FY13. As a result, the government has breached the zero quarterly borrowing limit from SBP during the second quarter of FY13.

The report said that the fiscal picture explains the federal government's compulsion to borrow. Although the consolidated fiscal deficit in H1-FY13 is likely to be 2.6 percent of GDP (which is the same as in H1-FY12), the US$ 1.8 billion inflow on account of Coalition Support Fund (CSF) made all the difference.

In terms of trade flows, the picture in H1-FY13 was quite benign. Falling import quantum and softer commodity prices, meant that Pakistan's import bill actually fell by 3.3 percent in H1-FY13, compared to 18.7 percent increase in the same period last year (PBS data).

Looking at exports, textiles increased by 8.6 percent as manufacturers were able to draw down inventories from last year - in the first half of FY12, textile exports fell by 4.9 percent. Part of this improvement can also be traced to the duty free access granted to Pakistan by EU in November 2012.