Growth target appears challenging

The State Bank of Pakistan (SBP) said Monday that a marked improvement in security conditions, better energy management and persistently low global commodity prices, have positioned the economy to further improve on its performance going forward, however, initial assessment suggests that achieving 5.5 percent GDP target would be challenging.
According to SBP''''s first quarterly report (July-September FY16) "The State of Pakistan''''s Economy," the government has envisaged GDP growth of 5.5 percent for FY16, anticipating better performance in all three economic sectors compared with the last year. While as per SBP projection, the country is likely to achieve a GDP growth 4.5 percent to 5 percent for FY16 as against the target of 5.5 percent as major Kharif crops incurred losses due to depressed prices of agri products, and unfavourable weather conditions.
The report also mentioned that loss making Public Sector Enterprises (PSEs), dwindling exports, lower Foreign Direct Investment and extreme weather conditions are matter of concern for the improvement in the economy.
According to SBP some improvements were already visible from the changes in key macroeconomic indicators during the first quarter of the year. Economic activity seems to be gearing up as large scale manufacturing recorded a noticeable increase over the last year.
The current account deficit also narrowed, which was comfortably financed by higher financial inflows; the country''''s foreign exchange reserves recorded all-time high levels and were sufficient enough to finance import bill of seven months, fiscal deficit was reduced, along with a shift in its financing away from SBP and inflation remained on low trajectory.
According to SBP, while these positive developments are welcome, much needs to be done to ensure their sustainability, following are some points of concern: Although, budget deficit for Q1-FY16 was lower than the same period last year, tax collection could not post the required growth. In order to keep the fiscal deficit within target without compromising on development spending, tax efforts have to be increased manifold, particularly by widening tax base and effective enforcement.
Loss making PSEs remained a contingent liability on scarce fiscal resources. The privatisation process of such PSEs is still at initial stages. This must be expedited to improve quality of services, and stem losses to the exchequer. So for the privatisation process has been confined to divesting government shares in profitable institutions through capital market transactions.
Dwindling exports continued to eclipse overall healthy performance of the external sector. Specifically, exports recorded a YoY decline for the 3rd quarter in a row. More disturbingly, this decline was attributed primarily to lower quantum. The risks to external sector also arise from international developments: weaker external demand could further hurt already declining exports;
In addition to exports, FDI also needs to contribute more towards external sector sustainability. While it is encouraging that FDI from China is likely to increase due to progress on various infrastructure projects under the CPEC, the country also requires foreign investment in exportable sectors. Extreme weather conditions in recent years have increased vulnerability of Pakistan''''s agricultural sector. In FY16 also, Kharif crops (cotton and rice) have suffered from heavy rainfall.
The report said that it is encouraging that 9th review of the IMF program has been completed successfully and several important reforms have been introduced, like independent statutory Monetary Policy Committee, Credit Bureaus Act, etc. However, the slow progress on privatisation process, and persistent distribution & transmission losses in the power sector remain a challenge.