Thursday , April 18 2019
Breaking News
Home / Business / Pak economy 2Q report: SBP estimates lower GDP growth, high inflation
Pak economy 2Q report: SBP estimates lower GDP growth, high inflation

Pak economy 2Q report: SBP estimates lower GDP growth, high inflation

KARACHI: State Bank of Pakistan (SBP) has projected the real GDP growth for fiscal year 2018/2019 would be around 3.5-4 percent much lower than the actual target of 6.2 percent.

The central bank in State of Pakistan Economy, Second Quarterly Report for Fiscal Year 2018/2019, issued on Monday the SBP further projected that the inflation would further increased to 6.5-7.5 percent during the current fiscal year as compared with actual target of 6 percent.

The GDP growth for fiscal year 2017/2018 was 5.2 percent and inflation for the same year was recorded at 3.9 percent.

The central bank estimated that remittances would be above the target during the current fiscal year to $21.5 billion. However, estimates for exports are at $25.5-27 billion lower than the target of $27.9 billion. Meanwhile, the estimates for imports have also been lowered to $54-56 billion from actual estimate of $58.5 billion.

The SBP estimated that the fiscal deficit would be around 6-7 percent against target of 4.9 percent. The fiscal deficit was at 6.6 percent last year. The current account deficit would stay around 4.5-5.5 percent of the GDP as against the target of 4 percent.

The SBP said that real GDP growth during FY19 is likely to moderate significantly, mainly due to slowdown in the growth of the agriculture sector and stabilization measures taken to preserve macroeconomic stability.

This is in line with a further contraction in LSM during Q2-FY19. Moreover, given that public development spending, a key driver for private sector industrial activities, is unlikely to pick up anytime soon, the full year outlook for manufacturing activities remains subdued.

Furthermore, private consumption is going to remain lower due to tighter monetary policy and pass through of exchange rate depreciation that has resulted in both higher energy prices and core inflation.

In addition, the prospects for the upcoming wheat crop remain subdued in terms of growth. All these aspects are going to constrain the services sector in the coming months as well.

Regarding price pressures, inflation is expected to remain high in H2-FY19. This is due to the second round impact of recent exchange rate depreciations, an upward adjustment in gas and electricity prices and higher budgetary borrowing from SBP.

However, the lagged impact of policy rate increases would be instrumental in keeping demand pressures in check. Acknowledging these risks, SBP continues to project average CPI inflation at 6.5-7.5 percent for the full year.

 

As noted earlier, the primary deficit has increased further while there has been a sharp reduction in development expenditures in order to improve the fiscal position.

This situation has become more challenging as the growth in current expenditure inched up to 17.3 percent during the first half as compared to 13.5 percent last year.

On the contrary, revenue collection has contracted by 2.4 percent during the same period as compared to the growth of 19.8 percent last year.

Since there is limited room to curtail government expenditures in the coming months, it is the growth in revenues that would be instrumental in determining the overall fiscal position for FY19.

Incorporating the performance of revenue collection during the second half in the last four years, SBP projects fiscal deficit to further deteriorate by 0.5 percent of GDP, which brings it close to the same level as in FY18.

As for the external sector, while the CAD has improved by USD 1.7 billion during the first seven months of FY19, it is still high at USD 8.4 billion.

Some improvement is expected to continue in the remaining months as imports are likely to contract further on account of moderating domestic demand and relatively low international oil price as compared to that at the beginning of FY19.4 However, merchandize exports are expected to miss the target due to waning demand in certain export destinations.

Additionally, this is compounded by the competitive pressures in the international arena and the lack of diversified and higher value added products that can effectively utilise the export quotas allowed under specific trade agreements.

Meanwhile on the external financing front, the efforts of the government have started to materialize in the shape of bilateral inflows from Saudi Arabia, UAE and China. Some of these inflows have already been realized, while rest are due in H2-FY19.

Along with the Saudi deferred oil payment facilities, these inflows have an important role in meeting the external financing gap for FY19; thereby, relieving pressure on the foreign exchange reserves and mitigating volatility in the FX market.