Country can benefit from CPEC, US deal with Iran, low interest rates, security: SBP

State Bank of Pakistan (SBP) said on Friday that overall macro environment for FY16 appears positive for the country as outlook for external account is stable, inflation is expected to remain below target and fiscal account would be in good shape.
SBP, in its annual report "State of Pakistan's Economy", has also warned that major risk to overall GDP growth stems from agriculture sector where some damages to cotton crop from the recent rains and floods have been reported. In addition, the continuing depressed prices may discourage growers from increasing their spending on better quality inputs. "However, SBP believes that the government's Kisan Package of Rs 341 billion is likely to compensate growers against the impact of lower commodity prices on their income," it added.
SBP pointed out that the Vision 2025 aimed at long term GDP growth of above 8 percent from 2018 and onwards would require a substantial boost to productivity levels, through investment in human capital. Furthermore, an effective and well-co-ordinated industrial policy is needed to attract investment, and expand industrial and export base. The resulting transition would not only help achieve higher growth in per capita income, this would also resolve forex constraints to growth, it predicted.
The report said the country can also benefit from some key developments including 42-year-low policy rate, improved security situation, the China Pakistan Economic Corridor and the US deal with Iran. The report pointed out that China Pakistan Economic Corridor (CPEC) offers a unique opportunity to fix our chronic problems in infrastructure and energy sectors. In addition, the membership of Shanghai Cooperation Organisation would provide Pakistan an easy access to a large market for its exports, and attract investments in the energy and infrastructure sectors.
In addition, the US deal with Iran will open up the Iranian market to many countries. With Iran's reintegration with the global economy, Pakistan can focus on this market to improve trade and meet energy needs. According to SBP, the government has set a GDP growth target of 5.5 percent for FY16, with all sectors expected to grow at a higher rate than FY15 and would be some 5 percent end of this fiscal year.
The CPI inflation for FY16 on the other hand is likely to remain below the target of 6.0 percent for the year. The downside risk to outlook comes from steeper than expected slowdown in Chinese economy, which may put further downward pressure on global commodity prices. However, unlike advanced economies, where deflation has emerged as a challenging economic problem, SBP does not expect CPI inflation in Pakistan to fall below zero percent. A number of developments support this assessment: (a) the recent increase in power tariffs and recovery of Gas Infrastructure Development Cess (GIDC); (b) a stable PKR against the major trading partners which lowered the risk of importing low inflation; (c) global oil prices would not fall as sharply as they did last year; and finally, (d) the domestic demand is likely to remain strong given the planned infrastructure spending, monetary easing and improvement in law and order situation.
"The outlook of the external sector appears comfortable, as we expect exports to benefit from the recent weakening of the PKR; a decline in policy rate and several measures taken by the government to boost exports," the report said. Imports are also likely to stay low if oil prices remain depressed. The only difficulty comes from a possible slowdown in infrastructure spending in the Gulf at the back of depressed oil prices, which may hold back remittance growth in Pakistan.
In terms of the fiscal deficit, the government is targeting to lower this by one percentage point to 4.3 percent in FY16. This target, however, assumes a 19.9 percent growth in FBR revenues (Rs 3,104 billion, compared to Rs 2,588 billion last year). This target appears challenging given that the global commodity prices are likely to stay low next year as well, which may exert a downward pressure on tax collection (mainly customs duty and sales tax) and some of the non-tax revenues.