Notable improvements in the key macroeconomic indicators have been observed during the first quarter (July-September) of this fiscal year (FY16); however, much needs to be done to ensure their sustainability, said State Bank of Pakistan (SBP) on Monday. According to SBP's first quarterly report, "The State of Pakistan's Economy", major Kharif crops incurred losses due to depressed prices of agri products, and unfavourable weather conditions and the preliminary estimates of cotton and rice production are not only well below their respective targets, but also indicate a decline compared to the last year's levels.
In fact, heavy rains in July 2015 inundated a large area under rice and cotton, which reduced their average yield. The cotton crop also suffered from pest and virus attacks, due to moist weather in the subsequent period. Industrial activity has gathered pace as large-scale manufacturing (LSM) recorded a growth of 3.9 percent during Q1-FY16, compared with a growth of 2.6 percent during the same period last year. Given the strong backward and forward linkages, healthy growth in the industrial sector bodes well for overall economic activity.
The performance of the service sector is yet to reflect a clear sign of improvement. While the strong profitability of the banking system and a visible improvement in transportation, storage and communication are key positives, the situation for wholesale & retail trade (the biggest component of the services sector) remains unclear. The service sector may also benefit from a higher import quantum. Although the country's imports plummeted by 14.7 percent in Q1-FY16, this was largely attributed to low unit prices, which overshadowed the modest increase in import quantum. Exports also declined by 14.1 percent in Q1-FY16, compared with a fall of 10.4 percent in Q1-FY15.
While both imports and exports posted a decline, the fall in imports was more pronounced, which reduced the trade deficit by 22.4 percent during Q1-FY16. This, together with a modest increase in remittances and continuation of CSF inflows, narrowed the current account deficit significantly. The current account deficit for Q1-FY16 was only US $0.35 billion, compared with a deficit of US $1.6 billion in Q1-FY15.
The country's total FX reserves increased by US $1.4 billion to reach an all time high level of US $20.1 billion by end of the first quarter. These could easily finance 7 months of the country's import bill. It is interesting to note that the build-up of FX reserves has accompanied with 2.6 percent depreciation of the PKR against the US Dollar during the quarter.
The PKR exchange rate, which anchors inflation expectations of businesses and directly impacts domestic prices of imported goods, created an upward pressure on inflation. However, this impact was more than offset by the swift pass-through of a fall in international commodity prices to domestic consumers during the quarter. On aggregate, average CPI inflation was 1.7 percent in Q1-FY16, compared with 7.5 percent in the same period last year.
Cognisant of aforementioned macroeconomic developments, SBP continued with monetary easing in Q1-FY16. The policy rate was slashed by 50 bps in September 2015 to decades' low level of 6.0 percent. This monetary easing together with a sharp increase in development spending, paved the way for healthy economic activity.
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