MPS - report card

Contrary to market expectations voiced through numerous brokerage house reports, BR Research in its recent articles hinted at the slashing of interest rates and its political imperatives. And the SBP Board dominated by government influenced experts did the same last week.
In the decision, the central bank assigned higher importance to lower inflation and muted growth over threats to the Balance of Payments. The MPS emphasised on euphoria of stock market and real estate market. Hot money welcomed the new government, pinning hopes on political stability and business-friendly policies.
The real GDP growth is disappointing in the outgoing year as it is provisioned to grow by 3.6 percent against the target of 4.3 percent and last year’s 4.4 percent. Agriculture and services sectors are the main culprits with subdued growth of 3.3 and 3.7 percent respectively –much lower than the last year’s numbers.
The silver lining is found in better performance of the industrial sector. Large-scale manufacturing sector exhibited growth of 4.1 percent in Jul-Apr FY13 as compared to mere 1.3 percent growth recorded in the same period last year.
The period is too short to predict a path, but this coupled with pumping in of hot money is a good sign to believe in reversing the declining trend of investments-to-GDP ratio; an imperative for absorbing ever-increasing labour force. Investment-to-GDP is provisioned to fall by 70 basis points to 14.2 in FY13, while the target for FY14 is set at 15.1 percent.
With a marginal increase of 70 bps in national savings to GDP to 14 percent, the gap between investment and saving has thinned, albeit for less than ideal reasons. Going forward, the SBP expects savings and investment to rise in tandem with the gap to remain steady.
The trends in inflation are encouraging, the 12 month-averages of CPI, food, as well as non-food inflation, all shown in MPS compendium are experiencing downhill journeys. That has allowed the doves to dominate at SBP for the past two years.
On the Balance of Payments front the current account deficit reduced to $1.9 billion in Jul-May FY13 from $3.9 billion in the corresponding period last year. Imports are lower by over $2 billion thanks to lower oil prices while the exports are stagnating owing to energy woes and poor law and order situation.
Now the PML-N government should focus on boosting exports to avert any external account crisis. Consistently increasing remittance inflows are a good omen too.
The foremost factor that can exhibit health in Balance of Payments is the channeling of foreign investment flows. And that can only happen once the confidence of domestic investors is restored. Smart money is moving in, let’s hope it will sustain and help Dar fulfill his promise of restoring seven percent growth in GDP in three years time.