Earlier, SBP was projecting a GDP growth of 4-4.5 percent as against a target of 6.2 percent for FY19 and 5.8 percent achieved in FY18.
According to SBP second quarterly report, the State of Economy Pakistan issued on Monday, real GDP growth during FY19 is likely to moderate significantly, mainly due to a slowdown in the growth of the agriculture sector and stabilization measures taken to preserve microeconomic activity.
Incorporating the performance of revenue collection during the second half in the last four years, SBP also projected that fiscal deficit to further deteriorate by 0.5 percent of GDP, which brings it close to the same level as in FY18.
As 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, SBP estimated.
Furthermore, private consumption is going to remain lower due to a 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, the report said and added that all these aspects are going to constrain the services sector in the coming months as well. Therefore, SBP has revised downward its projection for real GDP growth during FY19 by 0.5 percent to 3.5-4.0 percent from previous estimates of 4-4.5 percent.
Regarding price pressures, SBP is expecting that inflation to remain high in H2-FY19 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.
According to SBP, 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.
According to SBP, 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.
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, the report said.
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, the UAE and China. Some of these inflows have already been realized, while rest are due in H2-FY19. SBP said that 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.
SBP press release adds: "The State Bank of Pakistan today released its Second Quarterly Report on The State of Pakistan's Economyfor FY19. As stated by the report, the effects of macroeconomic stabilization measures taken since December 2017 started to unfold as the economy moved into the second quarter of FY19. More specifically, monetary tightening along with exchange rate adjustments, reduction in development expenditures of the federal government and regulatory measures helped contain domestic demand, which is visible from a marked slowdown in imports. This together with deceleration in external demand, underperformance of major kharif crops, and moderation in the fixed investment loans, let to notable deceleration in economic activity. Meanwhile, inflation continued to increase, mainly due to cost-push factors and some persistence in underlying demand pressures.
"According to the report, average headline CPI inflation rose to 6.5 percent during Q2-FY19 - the highest quarterly inflation since Q1-FY15, when global crude oil prices were around US$ 100 per barrel. This trajectory was largely dictated by its core component, non-food non-energy (NFNE), which further gathered momentum as the pass-through of exchange rate depreciation and second round impact of high oil price accentuated its already elevated level.
"Moreover, the report highlighted that the fiscal deficit continued to stay high despite a sharp cut in development spending since the beginning of FY19 and is undermining the efforts to contain domestic demand. While revenue collection declined, current expenditures increased.
"Regarding the external sector, the report observed that there was an improvement in the current account deficit due to decline in imports and a marked increase in workers' remittances during the review period. However, exports were generally affected by a slowdown in international demand. Also, net financial inflows were lower than last year, leading to a drop in SBP's FX reserves.
"The report contains a special section which evaluates the fiscal burden of state-owned enterprises in the power sector. Recommended measures include a move towards more effective, apolitical collection process; investment in the transmission and distribution network; and creation of a national level consensus towards the formulation of a coherent energy sector policy.
"The report features another special section on the importance of human capital in the context of CPEC. The analysis takes stock of the country's existing human capital and the employment opportunities set to arise in the near future as CPEC enters its next phase focusing on industrial special economic zones and agriculture. It then assesses just how prepared the domestic workforce is to capitalize on these opportunities, and provides a roadmap to address the associated skill-deficit.
"In the big picture, the report underscores the need to step up investments in human capital and technology. This will boost productivity and increase exportability of the country's goods, services and skilled labor, and allow it to generate FX in a sustainable manner."