SBP predicts 5-6% economic growth in current fiscal year

Says accelerated productive spending, better crops will help the economy

KARACHI: The State Bank of Pakistan (SBP) has anticipated a significant growth in the country’s economy for the current fiscal year, according to its quarterly report released on Friday.

The projection is backed by an accelerated productive spending and a rebound in agriculture produce, despite Pakistan experiencing current account and fiscal deficits, along with decelerated growth in revenue collection.



“The real Gross Domestic Product (GDP) growth in fiscal year 2016-17 is expected to be 5-6%, higher than last year’s 4.7%,” said the SBP report.

Major contribution is expected from the rebound in agriculture and increased pace of work on infrastructure and energy projects. In particular, the completion of energy projects under the China-Pakistan Economic Corridor (CPEC) is expected to provide additional boost to industrial growth.

“These expectations are in line with continuing robust trends in the private sector credit and import of machinery and raw materials,” the report said.

Meanwhile, the growth in large-scale manufacturing industries, though likely to fall short of its target, is expected to maintain last year’s level.

“The textile industry is expected to post some recovery in second half [January-June 2017] of the current fiscal year, as the cash-flow constraints of exporters may ease following the recently announced export package,” said the report.

“The commencement of operations of new power plants and the sustained increase in liquefied natural gas (LNG) imports are expected to help electricity generation and gas distribution to maintain last year’s momentum. Similarly, the growth in the construction sector is also likely to remain robust,” it added.



Additionally, the services sector is expected to achieve its target growth rate for the year. This is backed by the current trends in trade, especially imports, higher production and sale of commercial vehicles, substantial increase in bank credit, flourishing housing schemes and rising internet subscription.

Inflation

The SBP announced that the inflation rate is expected to remain low and stable in the backdrop of increase in agriculture production, stable exchange rate and a limited pass-through of rising international commodity prices to domestic prices.

“Full-year average Consumer Price Index inflation is expected to remain in the 4-5% range [against target of 6%],” said the report.

Moreover, the less-than-warranted increase in domestic fuel prices would limit its direct and second round impact on inflation, according to the SBP. The recent increase in investment demand as reflected by the widening of twin deficits may not have an adverse impact on inflation either.

Current account

According to the central bank, Pakistan’s current account deficit is likely to increase in the view of strong growth in imports as well as developments in international commodity prices. However, the country’s foreign exchange reserves will remain at a comfortable level.

“Some gains in exports due to the recently announced export package are expected to be offset by muted remittance growth,” said the report. “The declining number of Pakistani employees abroad, the British pound’s depreciation against the US dollar and stricter regulatory controls in the US are the main factors that will likely keep remittance inflows close to last year’s level.”

Fiscal deficit

The report states that the fiscal gap will be higher than the target due to the impact of recently announced export package, assuming no significant change in revenue collection occurs.



“Given the actual fiscal deficit is 2.4% of GDP in the first half [of the fiscal year], the full-year fiscal gap will be higher than the target of 3.8%,” said the report. “Growth in tax revenue decelerated to 6.2% during the same period as compared to over 20% increase last year. This slowdown seems to be an unintended consequence of various tax measures to support investment, growth and exports.”

On the other hand, expenditures are likely to remain elevated due to the government’s commitment to complete most of the power and infrastructure projects by close of fiscal year 2017-18.

Published in The Express Tribune, April 1^st, 2017.

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