In light of recent domestic and global developments, the State Bank of Pakistan (SBP) has revised the real GDP growth projection downward side. Going forward, SBP is also expecting that the government could face challenges in achieving revenue targets for this year, especially if there are disruptions in economic activity and may require increased expenditures in health and social sectors to cushion the impacts of the coronavirus pandemic.
According to Monetary Policy Statement issued by SBP on Tuesday after the meeting of the Monetary Policy Committee, with recent developments on local and international front now SBP's projection for real GDP growth is around 3.0 percent for this fiscal year (FY20) as against 3.5 percent estimated in November 2019. The actual target of real GDP growth for this fiscal year is 4 percent.
However, SBP is expecting a modest recovery next year provided that the spillover impact of the coronavirus outbreak on global trade and financial markets is moderate and short-lived. "In such a scenario, the export slowdown and market volatility should be contained while the benign growth and inflation impacts of lower global commodity prices would dominate," the SBP said.
Under an adverse scenario, a more prolonged and severe phase of weak demand in Pakistan's major export and remittance markets and depressed sentiment among domestic consumers and businesses could have a more material impact on growth.
In both these scenarios, SBP believed that the impact on the current account was expected to be mildly positive as the savings from low oil prices were expected to offset potential weaknesses in net exports and remittances.
According to the statement, the MPC noted that the dominant development since the last meeting on 28th January 2020 has been the outbreak of the coronavirus, which has taken a significant toll on human life around the world.
The outbreak has reduced external and domestic demand, while increasing risk aversion and uncertainty about the future. At the same time, global oil prices have plummeted which, if sustained, should help lower domestic inflation and improve the current account, SBP said.
Heightened global risk aversion has recently reduced demand for emerging market assets across the world, and has led to some volatility and depreciation in the domestic foreign exchange market in the past few days, as in other emerging markets.
The MPC emphasized that the current market volatility is externally driven and the strengthening in the fundamentals of Pakistan's economy that drove the improvement in Pakistan markets before the Coronavirus outbreak remains intact.
As a result, they viewed that the volatility in the domestic markets would likely subside once global risk aversion reduces and country-specific fundamentals regain importance.
The MPC also noted that a staff-level agreement with the IMF on the second review under the Extended Fund Facility (EFF) was successfully reached, which will support investor sentiment.
Recent high frequency indicators re-affirmed that the decline in most economic sectors was bottoming-out before the coronavirus outbreak. Large-scale manufacturing (LSM) rebounded strongly in December 2019, moving into positive growth of 9.7 percent YoY for the first time in the last six months, and indicated strengthening in a growing number of industries, especially export-oriented ones. Notwithstanding some improvement relative to last year, agricultural growth is likely to be lower than previously forecast.
The external sector continues to improve substantially. The current account deficit contracted by 72 percent to $2.65billion during July-January FY20, driven by a significant reduction in imports and modest growth in both exports and workers' remittances.
The MPC noted that Pakistan's exports have performed better in recent months than most of its competitors despite the challenging external environment. This improvement reflected the benefits of a more competitive exchange rate, availability of low-cost funding for export-oriented sectors under the SBP's refinancing facilities, and government efforts to facilitate businesses.
Fiscal consolidation remains on track, supporting a qualitative improvement in the inflation outlook. During July-February FY20, tax revenues showed a healthy increase of 17.1 percent over the same period last year. On the expenditure side, increased public spending relative to last year is supporting business activities, especially in construction-allied industries.
Weak economic activity continues to be a drag on private sector credit, which expanded at 3.6 percent during 1st Jul to 6th Mar FY20, less than half the rate seen during the same period of last year.
SBP continues to support economic activity through its refinancing facilities, such as its Long-term Financing Facility (LTFF) scheme for export-oriented sectors and its new TERF facility in light of the Coronavirus pandemic.
Headline inflation numbers recorded sizable changes since the last MPC meeting, driven by volatile food prices. National CPI inflation surged to 14.6 percent yoy in January 2020, before an equally notable deceleration in February 2020 to 12.4 percent.
The MPC noted that recent weekly outturns in essential food prices reinforced their assessment that the earlier shocks were transitory and that the underlying trend in headline inflation captured in relatively stable core inflation and declining consumer inflation expectations, would remain moderate in the remaining part of this fiscal year. Currently, average national CPI stands at 11.7 percent during the first eight months of FY20.
Barring unforeseen shocks, the inflation momentum is expected to moderate further in coming months. There is a high likelihood that average inflation in FY20 will be in the 11-12 percent range forecast by the MPC at the start of the year.
With a reduction of 75 bps in the policy rate, the MPC felt that real interest rates are appropriate on a forward-looking basis to achieve the 5-7 percent medium-term inflation target. The MPC also decided to make the interest rate corridor symmetric around the policy rate, in line with international best practices.
Comments
Comments are closed.