SBP warns current account gap can disrupt growth cycles

Says deficit is eating away foreign currency reserves, keeps its projection unchanged

KARACHI: Pakistan’s economy has exhibited strong growth in the first quarter of current fiscal year with a nine-year high expansion in large-scale manufacturing, increased tax revenue collection, recovery in exports and uptrend in foreign direct investment (FDI), according to the State Bank of Pakistan (SBP).

In its first quarterly report on the state of economy, which was released on Friday, the SBP suggested that the economy was poised to attempt to achieve the ambitious 6% GDP growth target this year.

However, it warned that the widening current account deficit had the potential to disrupt the growth trajectory with the emergence of new external challenges like surging international crude oil prices. This would add to the already high import bill and would, for sure, dent the foreign exchange reserves.



“The widening of current account deficit along with an increase in economic activity is a recurring phenomenon for Pakistan and one that has the tendency of disrupting growth cycles,” the SBP said in a statement.

“There is, hence, an urgent need to find innovative policy mixes, avenues for increasing the foreign exchange earnings and realigning policies favouring the export growth,” it said.

The current account deficit widened to $3.7 billion in the first (Jul-Sep) quarter, which was more than twice the reading in the same period of FY17.

“Funding the current account deficit led to a decline in the country’s foreign exchange reserves. Specifically, the SBP’s reserves declined by $2.3 billion during Q1-FY18 with the remaining reserves capable of providing cover for nearly three months of imports,” the report said.

As per current projections, according to the report, the rising oil prices while exerting upward pressure on imports will further widen the services deficit through increased transportation cost.

Nonetheless, a significant base effect, recent imposition of regulatory duties and depreciation of the rupee against the US dollar would likely restrict the import growth during the remainder of FY18. “Therefore, the current account deficit projection range remains unchanged,” it said.

“Inflows related to recently launched Sukuk and Eurobond, sharp increases in the FDI and expected Coalition Support Fund inflows will help keep the external sector stable to some extent in FY18.”

Cotton crop, fertiliser sector in trouble

The report pointed out that majority of the Kharif crops (like sugarcane, rice and maize) achieved or surpassed growth targets in the Jul-Sep 2017 quarter, except for the cotton crop.

“China has started exporting from its cotton reserves while subsidising local prices to make imported yarn unattractive in the domestic market. All this is resulting in an increased supply in the global market, putting downward pressure on cotton prices,” it said.

Fertiliser was highlighted as another problem area despite a notable increase in its use by the farmers which, along with sufficient availability of water and credit disbursement, helped increase the agricultural output.

“Fertiliser manufacturers are facing operational constraints in the form of gas diversion, expensive LNG and inventory build-up, forcing a few players to shut down their plants. This would have implications for the industrial as well as agriculture sector,” the SBP report said.

Revival in exports

“Broadly, there is no major change in the macroeconomic outlook from that set out in the last Annual Report of FY17,” the report said.

The only revision is in the export growth that has been revised upwards due to three main reasons.

First, while some of the structural headwinds still persist, such as lack of product and market diversification, uninterrupted energy supplies to the manufacturing sector is going to add to the current growth momentum.

Second, improving cyclical factors, such as increasing global demand and commodity prices, is another positive for Pakistani exports.



Third, recent exchange rate depreciation is expected to reflect positively in exports.

Rising income levels of consumers are fueling retail sales and commercial activities. Businesses, meanwhile, are in the middle of an expansionary phase with international investors’ attention boosting the level of competition and quality in the domestic market.

“The evidence of this can be found in sectors such as cement, steel, automobile and electronics where substantial capacity expansions are already under way,” the report added.

Published in The Express Tribune, January 20^th, 2018.

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