SBP further cuts growth outlook to eight-year low

KARACHI: The State Bank of Pakistan (SBP) on Monday further trimmed its 2019 growth forecast to an eight-year low, with the manufacturing and agriculture sectors taking a hit from measures taken to fend off macroeconomic risk.

The central bank in its second quarterly report said the economy is expected grow at a pace of 3.5-4.0 percent in the current fiscal year of 2018/19, down from its January forecast of 4.0 to 4.5 percent.

The bank predicted growth of.7-5.2 percent for the current fiscal year in its annual report published in October.

“… SBP has revised down its projection for real GDP 9gross domestic product0 growth during FY19 by 0.5 percent to 3.5-4.0 percent,” the bank said.

The government is eying a growth of 6.2 percent during the fiscal year, though economists and foreign donors say economy would remain moderate this year. The economy last grew below 3.5 percent was in the fiscal year 2011.

The bank said real GDP growth during FY19 is likely to moderate significantly, “mainly due to slowdown in the growth of the agriculture sector and stabilization measures taken to preserve macroeconomic stability”. The SBP said the downgrade shows a confluence of factors, including a further decline in agriculture, and industrial outputs, weaker performance by the manufacturing sector given a cut in public development spending, which is a key driver for private sector industrial activities. “Private consumption is going to remain lower due to tighter monetary policy and pass through of exchange rate depreciation that has resulted in both higher energy prices and core inflation,” it added.

“In addition, the prospects for the upcoming wheat crop remain subdued in terms of growth. All these aspects are going to constrain the services sector in the coming months as well.” The SBP sees inflation to remain high in the second half of this fiscal year due to the second round impact of recent exchange rate depreciations, an upward adjustment in gas and electricity prices and higher budgetary borrowing from the central bank. However, the lagged impact of policy rate increases would be instrumental in keeping demand pressures in check, it said. The SBP kept its forecast for consumer price index (CPI) inflation unchanged at 6.5-7.5 percent.

“… inflation continued to increase, mainly due to cost-push factors and some persistence in underlying demand pressures,” the bank said.

Average headline CPI inflation rose to 6.5 percent during second quarter of current fiscal year – the highest quarterly inflation since first quarter of fiscal 2015, when global crude oil prices were around $100 per barrel. “This trajectory was largely dictated by its core component, non-food non-energy (NFNE), which further gathered momentum as the pass-through of exchange rate depreciation and second round impact of high oil price accentuated its already elevated level,” the bank said.

The SBP said fiscal deficit continued to stay high despite a sharp cut in development spending since the beginning of FY19 and “is undermining the efforts to contain domestic demand”.

“While revenue collection declined, current expenditures increased,” it added. The fiscal deficit is likely to be 6.0 to 7.0 percent of GDP. This situation has become more challenging as the growth in current expenditure inched up to 17.3 percent during the first half as compared to 13.5 percent last year. On the contrary, revenue collection has contracted by 2.4 percent during the same period as compared to the growth of 19.8 percent last year.

“Since there is limited room to curtail government expenditures in the coming months, it is the growth in revenues that would be instrumental in determining the overall fiscal position for FY19,” it said. “Incorporating the performance of revenue collection during the second half in the last four years, SBP projects fiscal deficit to further deteriorate by 0.5 percent of GDP, which brings it close to the same level as in FY18.” The SBP expects the current account deficit to improve further in the second half of this year given slowdown in imports amid moderating domestic demand and relatively low international oil price as compared to that at the beginning of FY19. However, it warned that the exports could miss the $27.9 billion target as demand in certain export destinations waned. Moreover, the competitive pressures in the international markets and the lack of diversified and higher value are expected to weigh on the merchandised exports.

The exports growth projection was cut to $25-27.0 billion from $27.0 to $28.0 billion previously. Imports are likely to drop to $54.0-56.0 billion helped by lower imports.

The central bank underscored the need to step up investments in human capital and technology. This will boost productivity and increase exportability of the country’s goods, services and skilled labor, and allow it to generate foreign exchange in a sustainable manner.

Lastly, the government’s focus on revenue related measures is timely; however, over-reliance on the withholding mode of income tax regime for shoring up tax revenue needs to be rationalized. Unless such measures to facilitate structural transformation are taken, the Pakistan economy will continue to experience business cycles of shorter durations, the central bank said.