First quarterly report for the year 2018-19 released by the State Bank on 29th January contains, as usual, an apt description of state of the economy. This could be due to the fact that the report was published with a considerable delay when most of the macro-economic indicators were actually available. According to the report, "overall macroeconomic environment remained challenging during the first quarter of FY19". The foremost concern was of course a steep rise in global crude prices which reinforced inflationary pressures and eclipsed emerging improvement in the external sector. There were also uncertainties about balance of payments (BoP) support. Fiscal pressures too remained intact as expenditure rigidities left a limited room for manoeuvre. The response of the new government was cuts in development spending, partial reversal of tax relief measures and finding avenues to bridge the external financing gap. While the stabilisation process could continue, at least in the short-term, it is important to urgently initiate and expedite the needed structural reforms in the economy.
After achieving a 13-year high growth of 5.8 percent in FY18, Pakistan's economy is showing signs of moderation due to underperformance of both the agricultural and industrial sectors. While underlying inflationary pressures remained strong and the twin deficits stayed at elevated levels, monetary policy was tightened with the policy rate raised by 100 basis points during the quarter. Average inflation during Q1-FY19 increased to 5.6 percent -- the highest quarterly growth since Q1-FY15 and was projected to increase to 6.5-7.5 percent during 2018-19 as against the target of 6.0 percent during the year. Fiscal deficit widened to Rs 541.7 billion during Q1-FY19 compared to 440.8 billion in the corresponding period of last year due mainly to a steep rise in current spending. SBP has projected the overall fiscal deficit at 4.5-5.5 percent of GDP during FY19 as compared to the target of 4.0 percent. Although there was a slight narrowing of C/A deficit, the level of deficit, nonetheless, remained worrisome. The pressure on the balance of payments continued to mount, with the country's FX reserves declining by dollar 1.4 billion and PKR depreciating by 2.2 percent during the quarter. C/A deficit has been projected to range between 4.5-5.5 percent of GDP compared to the target of 4.0 percent during FY19.
While the macro-economic indicators during the first quarter were deeply troubling, the report gives some hope about the prospects of the economy during the remaining period of FY19. According to the outlook, C/A deficit could improve as foreign exchange inflows are expected during the year from both private and official sources. Deferred oil payment facility is also likely to be available from January, 2019 onwards. This will bolster the country's foreign exchange reserves and ease pressure in the domestic foreign exchange market. "Thus, continuing with the right mix of policies and sufficient BoP support, the country is expected to revert to a stable macroeconomic environment over the medium term," according to the report.
The economic analysis of the economy contained in the report, in our view, is quite objective and has not tried to give any positive spin to the events to please the government or the public at large. It is quite true that economic environment at the end of the first quarter of FY19 was not only challenging but almost critical and in some ways much more worrisome than the new government of PTI had expected. It was also unprecedented that the previous government had presented the budget for the whole year on optimistic assumptions and without realizing the gravity of the situation at that time. As such, the new government had to re-align the budget with the unfolding developments on the ground. Anyhow, when the new government took over the administration of the country, it had to face the twin challenges of fiscal and external sector deficits, economic slowdown, high inflationary pressures, rapidly declining foreign exchange reserves and mounting debt. The irony of the situation is compounded when the PML(N) takes credit for keeping the value of the rupee highly overvalued which, of course, was a bad policy.
There is no doubt that the present government has tried to tackle the most critical issues of the economy. The most urgent problem of course was finding foreign exchange resources to meet the widening C/A deficit and stabilise the level of foreign exchange reserves to avoid insolvency. This was an extraordinary job and the Prime Minister had to visit friendly countries at a short notice to elicit financial support. He has succeeded in his efforts to a large extent but it must be stressed that such support increases the debt level of the country and only postpones the problem. The government has depreciated the rupee substantiality and imposed heavy duties on non-essential items of imports but the deficit in the external sector is still unsustainable and calls for more measures to compensate for the weaknesses inherited from the past. The authorities have also tightened the monetary policy to keep the price pressures in check, mobilise more savings of the economy and contain the external sector deficit. We are certain that the SBP would continue to monitor the situation closely and take timely action for price stability. However, fiscal deficit during the year continues to be high and government has not taken enough measures to reduce it to sustainable levels. On the other side, it has granted concessions and exemptions to various sectors of the economy which, according to the Finance Minister, could cost the exchequer about Rs 7 billion. Most of the analysts, however, don't agree with this figure and believe that the cost of Rs 7 billion is highly underestimated. In short, the economic situation was grim during the first quarter of FY19 and continues to be so up till now.