State Bank's quarterly report for July-September, 2017 released on 19th January, 2018 contains, in general, an objective assessment of the economy together with its prospects for the remaining part of 2017-18. According to the Report, "preliminary data on key macro-economic indicators suggest that growth momentum remained strong during the first quarter of current fiscal year." Supported by sufficient water availability, healthy fertilizer off take and increase in agricultural credit disbursement, all the major Kharif crops, with the exception of cotton, achieved or surpassed the targets. The LSM also experienced a 10 percent growth during Q1-FY18. The high growth could be attributed to better energy availability, improved security situation and rising consumer demand. The healthy performance of commodity producing sectors had a positive impact on services sector as well. Timely policy support, favourable cyclical movements, stable inflation and growing confidence triggered an uptick in the private sector credit, particularly for fixed investment.There was a noteworthy rebound in FBR revenues on the back of increased economic activity. "New infrastructure projects, surge in imports, higher consumption of consumer durables and increased prices and consumption of POL products significantly contributed to both direct and indirect taxes." Nonetheless, the Report has emphasized on the need for more concerted efforts aimed at expanding the tax base.
In the external sector, there were significant gains in export growth and foreign direct investment but these gains were not enough to contain the balance of payments deficit. Import payments far exceeded those positives and the external sector remained under pressure. The widening of C/A deficit along with an increase in economic activity is a recurring phenomenon in Pakistan and there was "an urgent need to find innovative policy mix, avenues for raising foreign exchange earnings and realigning policies favouring export growth." The report has also underlined the need to address long-standing structural reforms in the fiscal and external sectors.
As for the outlook for FY18, prospects for GDP growth remain strong and the economy was well poised to achieve the growth target of 6 percent. Inflation during the year would remain below its annual target of 6 percent but there were two major risks to this forecast. Firstly, recent exchange rate depreciation could seep into domestic prices after some lag. Secondly, uncertain global oil prices pose an upside risk due to agreement between Opec and non-Opec countries to cut oil production, unfavourable effects of political shakeup in Saudi Arabia and rising tensions in the Middle East. SBP projects the C/A deficit to be between 4.0-5.0 percent of GDP during FY18 as against the projection of 2.6 percent. Fiscal accounts balance may remain under pressure as well and fiscal target of 4.1 percent of GDP may be missed. Although the performance with regard to tax collection has been as per expectations, development spending is maintaining the momentum and current expenditures have risen significantly.
We feel that the assessment of the economy by the SBP is both fair and comprehensive. Pakistan's growth momentum was strong during the first quarter of FY18. All the major Kharif crops surpassed targets except cotton which, nonetheless, exceeded last year's production. LSM sector has also done exceptionally well and if the performance of these two sectors is above average, other sectors of the economy also usually show a better performance due to close linkages. It seems that Pakistan would be able to achieve a growth rate of 6 percent or so after so many years and this will help raise the per capita income and instill a hope for better prospects of life among the public in the coming years. Inflation is also likely to be contained within the targeted level but the SBP has not minced words in saying that there are expectations of higher inflation due to the recent depreciation of the rupee and higher international oil prices which are likely to be passed on to the domestic consumers. However, the SBP is rightly concerned about the fiscal and external sectors. Though the FBR has done reasonably well in tax collections, development and current expenditures are rising fast with the result that overall fiscal deficit of the country may be in the range of 50.-6.0 percent as against the target of 4.1 percent of GDP. Obviously, such a negative development would necessitate higher borrowings from the banking system as non-banking borrowings, especially through the NSS, are on the decline. This will force the banks to reduce their lending to the private sector which could be a blow to the real sector of the economy. In absolute terms, public debt stock went up to Rs 22.0 trillion by September, 2017 from Rs 21.4 trillion at the end of June, 2017. If this rising trend was not contained to sustainable levels, the country could face a lot of issues in the management of the economy in future.
The most pressing problemof the country is obviously the mounting C/A deficit which is persistently going up due to surge in imports. Though the SBP has advised the government to address this problem yet the issue has not been highlighted to the extent as warranted. According to the latest data, the country's C/A balance has posted a deficit of dollar 7.4 billion during the first half of FY18 compared to dollar 4.6 billion in the comparable period last year depicting an increase of dollar 2.8 billion or 59 percent. The SBP believes that increasing global commodity demand and prices and the recent exchange depreciation was expected to reflect positively on exports. While this may be partly true, the increasing demand in the economy for imports may easily outstrip the gains from the rise in exports and leave the country more vulnerable to the external shocks. In our view, deficit inthe external sector is the most burning and serious issue of the country and the SBP needs to remind the government again and again about the risks involved in the persistence of such a trend.