GDP increases 5%, shows SBP’s first quarterly report

Industry and services lead growth, agriculture performs below target.

KARACHI:

Pakistan’s gross domestic product (GDP) increased 5% in the first quarter of 2013-14 as opposed to 2.9% in the corresponding period of the preceding fiscal year, according to the State Bank of Pakistan’s (SBP) first quarterly report on the state of the economy released on Friday.

The target set by the government in its Annual Plan for 2013-14 is 4.4% for the full fiscal year.

The report stated that the industry and services sectors led growth while agriculture performed below target, mainly because of water shortages at sowing time, low agricultural prices globally that reduced the area under cultivation, pest attacks and heavy rains before the harvest season.

As for the improvement in the industrial sector, the SBP said better energy supplies and higher capacity utilisation played a key role in generating growth during the first quarter.

With the revival of the industrial sector, import pressures reappeared, especially for capital goods and raw materials. The import of petroleum, machinery and metal was particularly strong, which increased the trade deficit by $0.6 billion during the quarter.

Additional stress on the current account came from delayed inflows of coalition support fund (CSF). As a result, the current account posted a deficit of $1.2 billion in the first quarter against a surplus of $0.4 billion in the corresponding three-month period last year.

Forex fiasco

With regard to the country’s foreign exchange reserves, which dropped $1.2 billion during the quarter, the SBP said repayments on external debt exceeded fresh disbursements while foreign investments remained shy. Resultantly, the rupee lost 6% value against the dollar during the quarter as opposed to 0.3% in the first quarter of the preceding year.

The SBP claimed that the rupee came under pressure due to adverse market sentiments, particularly when the IMF released the detailed letter of intent in September. The market focused on future foreign exchange purchases by the SBP, which caused the interbank rate of the dollar to touch a record high of Rs110.5 on September 26 before closing at Rs105.35 on the same day. “This unprecedented movement in a single day was triggered by the settlement of a large oil payment, which caused some misperception in the foreign exchange market… The fact that the interbank rate settled so quickly reflects how adverse market sentiments can trigger exaggerated movements in the rupee,” it said.

Inflation

The headline inflation figure increased to 8.1% in the first quarter of 2013-14 compared to 5.6% in the preceding quarter.

The SBP said the rupee depreciation against the dollar depreciation was ‘partially responsible’ for the increase in inflationary pressures. “Weaker rupee not only triggered inflation expectations, but also pushed up prices of imported items, like petroleum products,” the SBP said, adding that the impact on the headline inflation was exacerbated by liberal export of onions, lower wheat stocks, and the collusive behavior of traders and distributors, which pushed food inflation into double-digits.

Government borrowing

Government borrowing from the central bank was more pronounced in the first quarter of 2013-14, as commercial banks did not participate actively in T-bill auctions held during the quarter. As a result, the government could not meet the limit of zero quarterly borrowing from the SBP, though its borrowings were well below the limit agreed with the IMF.

Thus, the fiscal deficit fell to 1.1% of GDP in the quarter from 1.2% in the corresponding quarter of the preceding fiscal year. Saying that the improvement occurred on both revenue and expenditure sides, the report stated it was the increase in tax rates and not the base which resulted in higher collection during the quarter. As for the expenditure side, a major role was played by the reduction in interest payments following the interest rate cuts in 2012-13.

Public debt posted a record increase of Rs1 trillion during the quarter, which can primarily be traced to large revaluation losses associated with the external debt stock due to adverse exchange rate movements.

Published in The Express Tribune, March 1^st, 2014.

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