The current account deficit will continue to eat fast the foreign exchange reserves and keep economic managers engaged in making short-term international borrowing. PHOTO: FILE
However, it cautioned that the growth would remain short of the 6% target due likely to lower wheat output and late sugarcane crushing.
“Pakistan’s economy surpassing last year’s growth rate (5.3%) appears strong…GDP growth is likely to remain slightly below the target of 6% (in fiscal year 2018),” the SBP said in the second quarterly report for FY18 on the state of Pakistan’s economy.
CPEC is set to transform Pakistan's economy
The economy will remain at risk of a widening current account deficit, which is a combination of exorbitant oil imports, significantly maturing external debt repayments and slightly lower worker remittances in the remaining three months of FY18.
Consequently, the deficit will continue to eat fast the foreign exchange reserves and keep economic managers engaged in making short-term international borrowing.
“Risks to overall macroeconomic stability have increased due to widening imbalances in the country’s balance of payments,” the report said. “Reserves have already fallen to less than three months of the country’s import bill.” The central bank predicted that inflation would remain in the range of 4.5-5.5% against the target of 6% mainly due to low food prices. It stood at 4.2% last year.
Pakistan may attract maximum remittances of $20.5 billion from overseas workers in FY18 that would be slightly lower than the target of $20.7 billion.
Imports may shoot up to $54.3 billion against the target of $48.8 billion mainly due to heavy oil imports and imports of textile and steel inputs.
At the same time, exports may also surpass the target of $23.1 billion to a maximum of $24.6 billion. However, the growth would remain insufficient to finance the gap in current account deficit.
Credit flow to private sector recovered strongly from mid-January 2018 and increased by Rs167.9 billion between January 12 and March 16 compared to credit expansion of Rs60.3 billion in the corresponding period of previous year.
In its economic outlook, the central bank said there was some relief that the seven-month-long oil price rally came to an end in February 2018 when the commodity shed 11% of its value.
The growing state-economy conflict in Pakistan
“Encouragingly, the outlook of global oil prices looks much stable now as the rapid increase in shale production by the US is likely to outweigh anticipated pickup in global oil demand. If these expectations materialise, then at least the price component of Pakistan’s energy bill may be less of a concern going forward,” it said.
From inflation perspective, the stability in global oil market will be crucial. Since the end of December 2017, the government has increased domestic petrol prices by Rs11 per litre (13.7%) to pass on the impact of high import cost as well as rupee depreciation (9.5% from Dec-17 to Mar-18).
Though underlying inflation has stabilised and the headline inflation is low, upward pressures coming from fuel costs are hard to ignore.
Reviewing the economic progress in first half (Jul-Dec 2017) of FY18, the central bank said while the real sector of the economy presented an encouraging picture, the external account remained a cause for concern from the macroeconomic stability standpoint.
“Despite much-needed recovery in exports, Pakistan’s balance of payments continued to reel under the pressure of surging imports. The current account deficit increased to $7.9 billion in 1HFY18 from $4.7 billion in the same period of last year. Higher financial inflows compared to last year, albeit welcome, proved insufficient to rein in the decline in the country’s foreign exchange reserves,” it said.
With the drop in private and official financial inflows, the burden of financing the current account fell on the foreign exchange reserves.
“The maturing external debt obligations and the consequent drop in the forex reserves during 1HFY18 made it inevitable to resort to the international capital market. Consequently, Pakistan floated a Eurobond and Sukuk for a cumulative $2.5 billion in December 2017,” it said.
Large-scale manufacturing (LSM) growth touched a four-year high in the first half as upbeat demand for consumer durables and construction input induced manufacturing firms to flex their capacities.
Published in The Express Tribune, April 7th, 2018.
Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.
1733260913-0/image-(6)1733260913-0-270x192.webp "ev industry demands policy changes")
COMMENTS (2)
Comments are moderated and generally will be posted if they are on-topic and not abusive.
For more information, please see our Comments FAQ