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The State Bank of Pakistan (SBP) on Monday said that despite stabilization phase led by demand management policies, vulnerabilities in the inflation, external and fiscal sectors persisted, which suggests that current stabilization agenda needs to be reinforced with deep-rooted structural reforms. According to the State Bank of Pakistan's (SBP) Third Quarterly Report on "The State of Pakistan's Economy" released on Monday, with stabilization policies in place and the economy moving along the reforms agenda, the country's macroeconomic indicators are expected to slowly revert to a stable trajectory, however, in this process the real GDP growth is likely to remain contained.
"In spite of being in stabilization phase led by demand management policies for the last sixteen months, three challenges still stand out in Pakistan's economy. First, external sector remains vulnerable. Second, fiscal consolidation remains elusive. Third, inflation continues to attain higher plateaus," the report said and added that this basically suggests that current stabilization agenda needs to be reinforced with deep-rooted structural reforms.
The pace of economic growth already slowed down considerably during FY19 mainly in response to the policy measures taken to curb the twin deficits. These measures affected the performance of the industrial sector and dampened manufacturing activities in the country.
Towards the end of FY19, the challenges to the macroeconomy continued to persist. Specifically, fiscal deficit further deteriorated and while the current account gap relatively improved, but its sustainability remained a concern. Meanwhile, CPI inflation has already exceeded its 6.0 percent target for the last fiscal year.
As per provisional national income accounts, GDP growth moderated to 3.3 percent in FY19. Thus far, these trends have yet again exposed Pakistan's structural deficiencies and its vulnerabilities to the buildup of external and internal deficits, the report said.
According to SBP, the reforms in fiscal sector are particularly long awaited especially with respect to broadening the tax base, reduction in untargeted subsidies, withdrawal of discretionary tax exemptions and privatization/restructuring of loss making PSEs.
In particular, adjustment on the fiscal side has yet to get underway. Related to this, the revenue measures announced in FY20 federal budget are likely to keep disposable incomes and domestic demand under check. Amid such conditions, the industrial growth is not expected to rebound notably next year.
The report said that early investments in agriculture and Special Economic Zones (SEZs) under the CPEC and higher outlay of next year's PSDP can also have a positive impact on GDP growth in FY20.
As for the current account, the government is projecting the deficit to reduce further in FY20, on the back of an expected better export performance, containment of import payments and continued momentum in workers' remittances.
However, downside risks persist in the wake of a slowdown in global economy, attributed to escalated trade war between US-China and uncertainty in Europe. Under these circumstances, increasing exports to the traditional markets may prove challenging, the report warned. On the financing side, the initiation of the IMF Extended Fund Facility program would help assuage the overall external sector concerns, the report said.
Moreover, the fiscal deficit deteriorated further, as a steep fall in non-tax revenues and a slowdown in tax revenue led the overall revenue collection to stagnate at last year's level. On the other hand, expenditure increased sharply during Jul-Mar FY19, specifically the current expenditure that more than offset the decline in the development expenditure.
On the external front, the current account deficit (CAD) declined on the back of lower import payments for both goods and services, and a decent growth in workers' remittances. However, given the elevated level of CAD and insufficient foreign investments to fill the financing gap, the country had to resort to bilateral and commercial sources for external financing.
The report features a special section on power tariffs in Pakistan. The analysis explains the process of power tariff determination in the country and assesses why tariffs have not softened despite the decline in fuel cost. It suggests that capacity payments constitute the bulk of power tariffs in Pakistan, and a sharp increase in these payments in recent years has completely offset gains from declining fuel cost.
The report also contains another special section on the outlook of food security in Pakistan. The analysis emphasizes therelated challenges that the country may face going forward, such as a high population growth and unfavorable water and climatic conditions, unless remedial measures are taken urgently.

Copyright Business Recorder, 2019

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