The State Bank of Pakistan (SBP) Friday said achieving annual fiscal deficit target may be difficult due to revenue shortfall. According to SBP's first quarterly report, given the revenue shortfall during Q1FY17, achieving the annual fiscal deficit target of 3.8 percent of GDP would be challenging and it will require additional fiscal consolidation efforts on the part of the government. The current account mainly weakened in Q1FY17 due to absence of Coalition Support Fund (CSF) inflows.
Further pressure came from a widening trade deficit (with rising imports and declining exports) and a fall in remittances (the first such decline in the past 14 quarters). "We expect the current account deficit to remain in the range of 1-2 percent of GDP in FY17, which is higher than the earlier forecasts," it added.
The outlook on remittances has been marginally lowered, as the expected recovery in inflows from the seasonal slowdown in July 2016 has not materialised yet. Furthermore, remittances from the GCC countries (which contributed over 60 percent of total remittances) have declined on YoY basis during July-November FY17, due to fiscal consolidation measures being undertaken in the region. Similarly, remittances from the UK fell mainly due to the sharp depreciation of the pound against the US dollar following Brexit.
Although the first quarter of the fiscal year coincides with seasonal credit retirement to banks, the magnitude of this retirement was unusually large in Q1-FY17, due to the exceptional rise in credit off-take during June 2016, which was retired next month (in line with expectations) and large corporates shied away from leveraging further despite historic low interest rates, as they already have sufficient liquidity with them. A positive development, however, was the higher loan demand for fixed investment purposes, particularly for energy-related capital expenditures.
The heavy retirement by private businesses during July 2016, in turn, improved the availability of funds in the interbank market. However, the major challenge for the central bank, in terms of managing the SBP target rate, came when a record maturity of PIBs (worth Rs 1.4 trillion) and Eid-related cash withdrawals, influenced liquidity conditions in the market. However, a sizable volume of maturing injections under Open Market Operations (OMO) in July 2016 provided a comfort as this absorbed inflows from maturing PIBs.
According to report, SBP effectively managed the interbank liquidity throughout the quarter to ensure stability in the overnight rates, despite significant volatility in interbank liquidity flows. This was also reflected in the stability of the 6-month KIBOR - a benchmark rate used by commercial banks and private businesses. The first quarter also witnessed a shift in borrowing patterns of the government. Specifically, the government made net retirement worth Rs 268.1 billion to commercial banks, as opposed to net borrowing of Rs 443.8 billion in Q1-FY16. Simultaneously, in order to meet its increased budgetary needs in the wake of a higher fiscal deficit, the government resorted to SBP borrowings. This further reduced the demand for funds available with commercial banks in the quarter. The resulting increase in liquidity with banks led to a decline in the weighted average lending rates of commercial banks, the report said.
The shift in government borrowings from SBP did not impact the reserve money, as it was largely offset by the roll-back of OMO injections from the interbank market. The growth in overall money supply (M2) remained almost muted due to heavy retirements under private sector credit. SBP also adopted a cautious stance in its monetary policy reviews of July, September and November, 2016, and kept the policy rate unchanged.
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