KARACHI: Pakistan is unlikely to meet the economic growth target of 4 percent this fiscal, due to soft trends in agriculture and manufacturing production, the central bank said on Tuesday, advising the government to address structural vulnerabilities to put the economy on a sustainable growth trajectory.
Performance of commodity producing sectors would likely remain subdued, the State Bank of Pakistan (SBP) said in its first quarterly report on the State of Pakistan’s Economy for FY20.
“In view of these developments, achieving the real GDP growth target of 4 percent appears unlikely,” the SBP said.
The SBP in its previous report published in October had predicted that the economy would grow at 3-4 percent this fiscal. The economy grew 3.3 percent in last fiscal year.
“The policy continuation is warranted given the lingering vulnerabilities in the economy and the chronic nature of the structural weaknesses,” it said.
The central bank’s report spells out in sharp detail the challenges being faced by the economy including mismatch related to exports quantum and earnings, delays in implementation of tax measures and weak management in food prices.
“Most of the improvement in the current account has come from a reduction in the country’s import bill; exports have yet to contribute significantly, as healthy quantum gains are not supported by price trends,” the SBP said.
Furthermore, while the drawdown in foreign exchange reserves has been reversed, the overall reserves position remains below the comfort level (in terms of import coverage). It said the announced documentation-related measures should be implemented to bring needed diversification in the revenue base. “This is important to rebalance the country’s fiscal revenue structure, which is currently over-reliant on very few sectors.”
It also pointed out that supply-management issues, such as weak governance in commodity procurement agencies, hoarding practices and regional trade bottlenecks, might potentially perpetuate food inflation going forward.
The central bank also advised to build on the ease of doing business gains. It is important for firms to leverage on the facilitative policies, particularly export-promotion incentives, and gain a foothold in the global value chains. This would not only align the country’s product mix with trends in global demand, but also put exports on a sustainable growth path.
The SBP forecast average headline consumer price index (CPI) inflation to stay within the range of 11-12 percent. However, this forecast is subject to upside risks in the form of a reversal in global crude prices, exchange rate depreciation and increased budgetary borrowings, it noted.
The SBP said its latest report projections show FY20 current account deficit at 1.5 – 2.5 percent of GDP down from 2.5-3.5 percent in an annual report published in October last year, largely due to increasing benefits from import compression. With the industrial sector under stress, its demand for imported raw material is expected to stay low. “On the flip side, the tepid global growth outlook and commodity prices may also weigh on both exports and remittances,” the SBP said. “Nonetheless, any negative impact on these earnings would be more than offset by the reduction in import payments.”
Pakistan’s economy moved progressively along the adjustment path during the first quarter of FY20, according to the SBP’s statement. Macroeconomic stabilisation process picked up momentum with the initiation of the IMF’s Extended Fund Facility program: the SBP continued to keep the monetary policy consistent with the medium-term inflation target; whereas, consolidation efforts were visible on the fiscal front.
Furthermore, a market-based exchange rate system was implemented, to which the interbank foreign exchange market adjusted relatively well. Notably, the government avoided deficit monetisation, including rollover of SBP debt and actively pursued documentation efforts, it noted.