M J Hayat
LAHORE: The reduction in development spending and austerity measures
are likely to relatively slower the growth in overall fiscal spending
and the measures are expected to contain the fiscal deficit in the
range of 5 to 6 percent of GDP during FY19, According to State Bank of
Pakistan State of Economy.
Recent policy measures and developments including monetary tightening,
exchange rate depreciation and changes in import and custom duties are
all likely to dampen domestic demand, especially imports, the report
The additional revenue measures and a cut in federal development
spending proposed in the Finance Supplementary (Amendment) Bill, 2018
might contain fiscal deficit as well. However, these developments will
have implications for growth and inflation going forward. In this
context, the real GDP growth target of 6.2 percent for FY19 appears
ambitious, it added.
The industrial sector, in particular, may witness a slowdown due to an
expected reduction in consumer demand. More specifically,
construction-allied and consumer durable industries may see slower
growth in production, it said.
The former may be affected by a contraction in development spending,
while the latter could be hit by rising domestic prices due to
exchange rate depreciation and higher borrowing cost. Moreover, lower
sugar production on account of expected decline in sugarcane crop may
also dampen the food group’s contribution to LSM growth. Decline in
the area under sugarcane crop, water shortages at the time of sowing
of kharif crops – especially cotton – and weak trends in the off-take
of fertilizer indicate that agriculture sector may not repeat last
year’s extraordinary performance. Recent rains and improved water
availability as well as increased area under rice and cotton crops,
however, may provide some support. Therefore, growth in agriculture
may fall below the target as well as the last year’s level of 3.8
percent. Slower growth in both industrial and agriculture sectors will
also affect performance of the services sector, the report
In this background, the real GDP growth is projected in the range of
4.7 to 5.2 percent during FY19. In addition to slower economic
activity, exchange rate depreciation and other administrative
measures, especially the increase in import duties, would help
moderate growth in imports barring any major shock to international
oil prices, the report stated.
Meanwhile exports are expected to maintain the FY18 momentum into FY19
as well; though uncertainties due to growing global trade tensions
could pose some downside risks to this momentum. Besides the lagged
impact of depreciation, improved energy supply, better availability of
raw materials (especially cotton, rice and hides), and continuation of
the incentive package for export-oriented industries are the key
factors supporting prospects of higher growth in exports, the report
In addition, Pakistan can also benefit from a likely increase in food
prices in international market. Persistence of drought-like conditions
in major wheat producing countries could lead to higher wheat prices,
increasing prospects for Pakistan to offload surplus wheat stock.
Moreover, workers’ remittances are expected to increase moderately
during FY19 on account of an uptick in international oil prices,
steady economic activity in advanced economies, and various steps
taken to facilitate remittances through official channels like
m-wallet and asan remittance account, it underscored.
Incorporating these developments, the current account deficit is
projected to be in the range of 5 to 6 percent of GDP for FY19.
In addition to the earlier policy measures aimed to contain imports,
recent changes in income tax – partial reversal of the tax relief
announced in the FY19 budget, administrative revenue measures, and
further increase in regulatory and federal excise duties would help
maintain a higher growth in tax collection, the report highlighted.
Similarly, the announced reduction in development spending and
austerity measures are likely to relatively slower the growth in
overall fiscal spending. These measures are expected to contain the
fiscal deficit in the range of 5 to 6 percent of GDP during FY19. The
overall assessment, therefore, suggests that underlying inflationary
pressures may persist. Increase in gas tariffs, import duties and
excise duty would further add to inflation both directly and
indirectly, it said.
Moreover, pass-through of higher oil prices and exchange rate
depreciation would keep inflation expectations high. Some of the
impact of these factors, however, is likely to be offset by the
increase in policy rate and lower food inflation, which is expected to
remain subdued in FY19 as well in view of sufficient stocks of staple
food items. With these developments in the background, average
inflation is projected in the range of 6.5 to 7.5 percent during FY19,
against 3.9 percent recorded in FY18 and 6.0 percent target for the
year, it said. However, there are risks to this assessment emanating
particularly from volatile energy price. Moreover, global food prices
may also increase in case drought-like conditions persist in major
wheat producing countries, the report concluded.