Economy projected to move to stability: SBP
g Overall C/A deficit expected to narrow down to 4.5-5.5pc of GDP from 6.1 pc in FY18
By M J Hayat
LAHORE: The economy is expected to revert to a stable macroeconomic environment over the medium term, said a recent report of the State Bank of Pakistan (SBP).
The policy environment through the rest of the year is likely to centre around achieving macroeconomic stability, the report said, adding that the State Bank of Pakistan (SBP) has already increased the policy rate by another 150 BPS in November 2018, in order to check inflationary pressures and rising inflationary expectations.
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 highlighted.
Similarly, fiscal policy has been recalibrated to work in tandem with the stabilization objective since the formation of the new government. In particular, it has cut budgeted development expenditures for FY19 and has partially reversed the tax relief measures that were announced earlier; as mentioned before, these measures had contributed to lower revenue mobilization during Q1-FY19, the report pointed out.
Thus, with the policy focus now tilted predominantly towards macroeconomic stabilization, the 6.2 percent target for real GDP growth seems unachievable, the report said, 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, the report added.
Similarly, in case of LSM, the construction-allied industries will continue to give a subdued performance as the government is likely to contain its development spending. 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, the report went on to say.
As for the external sector, the most important development has been the bearish spell in the global crude market that began in early October and ran through the rest of Q2-FY19, it indicated, explaining oil prices have fallen by a quarter during this period and reached a year-low level of $54 per barrel. This will lift some pressure from Pakistan’s oil import bill in at least the second quarter of the year.
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, the report said further saying at the same time, 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.
Still, the estimates for overall foreign exchange earnings are on the higher side, as workers’ remittances are projected to sustain a high growth. 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, the central bank report viewed.
Financing of the current account might improve going forward as there is an expectation of receiving higher foreign exchange inflows from both private and official sources during the second half of FY19, the report underscored. In particular, recent bilateral arrangements, including the deferred oil payments facility, are likely to be available from January 2019 onwards. Not only would this bolster the country’s foreign exchange reserves, but also ease pressures in the domestic foreign exchange market, it said.
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 concluded.