![the decline in cotton crop is expected to impact the real gdp growth for fy20 because of its impact on value addition cotton ginning agri based industries and the services sector photo file the decline in cotton crop is expected to impact the real gdp growth for fy20 because of its impact on value addition cotton ginning agri based industries and the services sector photo file](https://i.tribune.com.pk/media/images/2175698-image-1584127762/2175698-image-1584127762.jpg)
The minutes showed that economic growth would remain low this year due to the agriculture-sector supply shocks and the Federal Board of Revenue (FBR) would not be able to achieve even the downward-revised tax target of Rs5.238 trillion. The federal cabinet has not yet endorsed the revision in the FBR's target from Rs5.5 trillion.
The MPC had met on January 28 and decided to keep the policy rate unchanged at 13.25% with a majority decision of 7-2. The central bank released the minutes of the meeting days before the next MPC meeting on Tuesday to review the monetary policy.
This week, Prime Minister Imran Khan has twice said that the central bank is going to cut the interest rate.
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"Banks demand an added premium while lending to the private sector, particularly at a time when the repayment risk is high," according to the minutes of the MPC meeting.
The situation warrants action on part of the central bank, which is not playing its role effectively and has long been accused of protecting the interests of banks as compared to consumers.
The minutes showed that as the government increased its borrowing from scheduled banks, the spread between risk-free investments and risky lending normalised. This was otherwise declining when the government was retiring the debt taken from scheduled banks. With the shift in the pattern of government borrowing from SBP to scheduled banks, the inter-bank market currently operates in deficit mode.
The State Bank of Pakistan (SBP) noted that the demand was not growing significantly and the reasons for weak private sector credit demand included higher cost of borrowing, persistent slowdown in economic activities and high government borrowing, which likely altered the credit risk premium.
The minutes showed that the central bank would cut the growth projection for the private sector credit for this fiscal year.
The overall private sector credit witnessed an increase of Rs146 billion during July 1, 2019 to January 17, 2020, which was lower than the expansion of Rs507 billion in the corresponding period of last fiscal year. This is largely due to a decrease in credit to large scale manufacturing. The fixed investment loans declined given the economic slowdown and the higher cost of borrowing, showed the minutes.
Economic growth prospects
The SBP staff apprised the MPC that the impact of supply shocks in agriculture might lead to lower than expected economic growth. The federal government has set the economic growth rate target at 4% while the central bank first projected it at 3.5% and later on announced that it would be lower than this benchmark.
The central bank has based its latest assessment on the second estimate of Ministry of National Food Security and Research. It said that the production of rice and maize has remained better than last year but the cotton crop is estimated to decline by 4.2% compared to last year.
The decline in the cotton crop is expected to impact the real GDP growth for FY20 because of its impact on value addition, cotton ginning, agri-based industries and the services sector.
But the central bank saw some recovery signs too. It said there were signs of a bottoming out of the declining trends and an assessment of employment conditions in LSM industries reflected that after showing a steep decline during March-June period of 2019, the trend stabilised and was likely to move up with the expected uptick in manufacturing activity.
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Fiscal framework
According to the SBP estimates, the budget deficit for this fiscal year would likely remain close to the annual target of 7.1% of GDP, as shortfall in tax revenue is likely to be offset by higher non-tax revenues.
"The government may not be able to meet the tax revenue target of Rs5.238 trillion, which has been revised from Rs5.503 trillion," according to the minutes.
The federal government has given contradictory statements about the possibility of the further cut in the FBR target. The acting chairperson of the FBR claimed before the Public Accounts Committee meeting that the International Monetary Fund (IMF) agreed to further cut the tax collection target. But the finance ministry has denied that the IMF agreed to reduce the target.
Published in The Express Tribune, March 14th, 2020.
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