NationalVolume 14 Issue # 17

SBP report: A gloomy outlook

The economic horizon appears to be cloudy. According to the second quarterly report for FY19 released by the State Bank of Pakistan the real GDP growth rate during 2018-19 is projected to be in the range of 3.5-4.0 percent, indicating a sharp decline, compared to growth of 5.2 percent in the preceding year and the target of 6.2 percent for FY19. The slowdown in growth is said to be mainly due to the decline in the agriculture sector and stabilisation measures taken to preserve macroeconomic stability. The full year outlook for manufacturing activities and services sector is also gloomy.

On the other hand, CPI inflation during the second quarter of FY19 on the YoY basis touched the highest level in 17 consecutive quarters, while price pressures are expected to remain high due to the impact of exchange rate depreciation, an upward adjustment in gas and electricity prices and higher budgetary borrowings from the SBP.  Further, the SBP has projected the CPI inflation in the range of 6.5-7.5 percent for the full year.

To make matters worse, the fiscal situation has also deteriorated further due to sharp growth of 17.3 percent in current expenditures and a contraction of 2.4 percent in revenue collection during the first half of the current fiscal. The SBP has projected the fiscal deficit at 6.0-7.0 percent of the GDP during FY19, compared to the deficit of 6.6 percent in the previous year and the target of 4.9 percent for the current year.

The current expenditures are running very high despite the austerity drive of the government and revenue receipts are lagging behind the target. The efforts of the government to widen and deepen the tax net are not yielding the desired results. Even the primary fiscal deficit is up. Development expenditure is being sacrificed to contain the overall fiscal deficit. Provincial governments are not generating budget surpluses and all these factors continue to push up the budget deficit which could be as high as 6.6 percent or the same as in the previous year, or even higher. Unfortunately, the government feels constrained to take further measures to mobilise a higher level of revenues due to stiff opposition by political parties and the fear of inflicting more pain on ordinary people. Both widening fiscal deficit and a large C/A deficit are leading to considerable accumulation of debt. If the twin deficits are not controlled, the debt servicing cost would increase sharply, reducing the available resources for development spending and mortgaging the future of coming generations.

According to the SBP, some improvement is expected in the coming months as imports are likely to contract further on account of moderating domestic demand and relatively low international oil prices as compared to the beginning of FY19. However, exports are likely to miss the target due to waning demand in certain export destinations, 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. The SBP has projected the C/A deficit for 2018-19 in the range of 4.5-5.5 percent of the GDP, compared to 6.1 percent in FY18 and the target of 4.0 percent for the current year.

However, there is some good news on the external sector, as the current account (C/A) deficit has improved by $1.7 billion during the first seven months of FY19. But it is still very high at $8.4 billion. To rescue the economy from its present difficult situation, the government will have to undertake essential reform measures to speed up the pace of recovery. The previous government showed criminal neglect towards the challenges that have become a burden for the PTI administration. An overriding need is to shore up the dwindling foreign exchange reserves and stabilise the external sector. The Prime Minister has visited various friendly countries to seek assistance for plugging the huge hole in the current account, and his efforts have started to bear fruit in the form of bilateral inflows from Saudi Arabia, the UAE and China.

Along with the Saudi deferred oil payment facility, these inflows will play an important role in dealing with the external financing gap challenge for the current year, thereby relieving pressure on the foreign exchange reserves and mitigating volatility in the FX market. However, it may be added that the massive deficit in the external sector continues to be the most important challenge for the economy despite these inflows, substantial depreciation of the rupee and the tariff measures to curb imports. As a long-term remedial measure, the government should devise a comprehensive plan to raise revenue internally and boost exports.