According to SBP''s first quarterly report on "The State of Pakistan''s Economy" for FY19, after achieving a 13-year high growth of 5.8 percent in FY18, Pakistan''s economy is showing signs of moderation as both the agriculture and industrial sectors were underperformed during Q1FY19 relative to the same period last year.
However, in order to revert to a stable macroeconomic environment over the medium term, the report underlines the importance of the continuation of the right mix of polices. The report emphasized on initiating the needed structural reforms in order to push the country''s productivity frontier and take the growth momentum forward.
"While the ongoing macroeconomic stabilization process would continue at least over the short term, it has now become important to urgently initiate and expedite the needed structural reforms in the economy," the report said.
According to SBP, the preliminary data suggested that the overall macroeconomic environment were remained challenging during the first quarter of FY19. The primary concern was the steep rise in global crude prices, which not only reinforced the already strong underlying inflationary pressures in the economy, but also eclipsed emerging improvements in the external sector.
Fiscal pressures also remained intact as expenditure rigidities allowed only a limited room for the government to maneuver. Responding to these challenges, the new political regime immediately announced cuts in development spending, partially reversed tax relief measures, and also explored avenues to bridge the external financing gap. These measures had contributed to lower revenue mobilization during Q1-FY19
Kharif crops have already underperformed, and given the persistent water shortages across the country, the overall crop sector is unlikely to rebound in the rest of the year. Therefore, the overall contribution of agriculture in GDP growth would largely depend upon the performance of the livestock sub-sector.
Furthermore, the large-scale manufacturing also contracted by 1.7 percent during Q1FY19, after recording a healthy growth of 9.9 percent during Q1-FY18. Noticeably, the output of construction-allied and consumer durable segments, which were the major drivers of growth last year, decelerated on a YoY basis.
According to the report, the 6.2 percent target for real GDP growth seems unachievable with the policy focus now tilted towards macroeconomic stabilization.
The report highlighted that with the underlying inflationary pressures remaining strong and the twin deficits staying at elevated levels, the monetary policy continued to move along the adjustment path.
During the two Monetary Policy Committee (MPC) meetings, the policy rate was raised by a cumulative 200 basis points. Besides the persistence of strong demand pressures, the second-round impact of higher fuel prices and exchange rate depreciation pushed up core inflation.
As for private credit, a strong expansion was observed during Q1FY19, in contrast to net retirements witnessed in the same quarter last year. The activity in working capital loans was more prominent, since rising commodity prices and input costs increased the financing requirements of businesses.
The report also observed that the consolidated revenues grew by 7.5 percent during the quarter; however, this pace was lower than the 18.9 percent uptick witnessed during Q1-FY18. Expenditures grew by 11.0 percent during the quarter compared to 13.5 percent in the same period last year. The resultant higher fiscal deficit was financed through increased government borrowing from both domestic and external sources.
On the external front, the report highlighted that the continued exports growth and a steady increase in workers'' remittances partially helped contain the current account deficit.
However, the level of this deficit remained a concern, as rising oil prices resulted in the quarterly import bill crossing the $ 4.0 billion mark. With foreign investments declining on a YoY basis and external borrowing by the private sector remaining subdued, the financial inflows proved insufficient.
Resultantly, pressure on the balance of payments continued to mount, with the country''s FX reserves declining by $ 1.4 billion and the Pak Rupee depreciated by 2.2 percent during the quarter under review.
Nonetheless, financing of the current account might improve going forward as there is an expectation of receiving higher foreign inflows from both private and official sources during the second half of FY19. Not only would this bolster the country''s FX reserves, but also ease pressures in the domestic foreign exchange market, the report said.
As against 6 percent target, SBP''s inflation forecast for the full year stands at 6.5 to 7.5 percent, which takes into account the impact of revisions in gas tariffs and the second-round impact of exchange rate depreciation.
The report said that consumer industries would also feel the brunt of reduced demand, as purchasing powers are hit by rising inflation, increasing interest rates and adverse currency movements. In the case of non-energy imports, the current slowdown may continue going forward amidst weakening domestic economic activity, exchange rate depreciation and increase in import duties, it added.
At the same time, the SBP expecting that exports may gain from exchange rate depreciation and increase in consumer spending in the advanced economies, but their momentum could possibly be weakened by rising cost pressures Resultantly, the overall current account deficit is expected to narrow down to 4.5-5.5 percent of GDP, from 6.1 percent in FY18.
In particular, recent bilateral arrangements, including the deferred oil payments facility, are likely to be available from January 2019 onwards. The SBP believed that the deferred oil payments facility not only bolster the country''s foreign exchange reserves, but also ease pressures in the domestic foreign exchange market.
Thus, continuing with a right mix of policies and sufficient BoP support, the country is expected to revert to a stable macroeconomic environment over the medium term, the report said.