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Economic growth depends on infrastructure projects, spreading out industries: SBP

Bank sees consistency in investment and industry policies must to get sustainability in growth momentum

The State Bank of Pakistan (SBP) in its recent third quarterly report said that the growth prospects of Pakistan’s economy from 2018 onwards would largely depend on planned infrastructure projects and capacity expansion by industries. It urged for the coordination among institutions including Ministry of Finance, Ministry of Commerce, Ministry of Planning and Ministry of Industries and Production.

The Central Bank says consistency in policies, especially those related to investment and industry would be necessary to ensure sustainability of growth momentum. The report also emphasized the importance of sustainable levels of current and fiscal accounts in order to maintain the prevailing growth momentum, and hard-earned economic stabilization.

The overall improvement in business sentiments along with supportive policies like historic low interest rate, high infrastructure spending and better law and order, has encouraged a number of firms to pursue expansion plans. This was seen in a substantial surge in private sector credit off-take during fiscal year with a sizable share of fixed investment loans.

Pakistan’s macroeconomic indicators continue to improve. In particular, key constraints impeding the economy from achieving high growth i.e. power supply and security situation are gradually getting better.

In this backdrop, the government envisages a higher real GDP growth of 6.0 percent for fiscal year 2018, compared to 5.3 percent recorded in fiscal year 2017.

SBP expecting that inflation may remain within the target of 6 percent amidst some pick-up on the back of recovery in global prices of oil and other commodities, and push from domestic demand factors. The credit expansion is likely to maintain its pace with better prospects for investment and business activities.

The fiscal year 2018 budget has set a fiscal deficit target of 4.1 percent of GDP for the year. This will be supported by a 14 percent growth (Rs 4 trillion) in FBR tax revenues. Along with continuing some of the relief measures, the budget has also introduced a number of measures to achieve this enhanced revenue target. On the external front, the recovery in the global economy, particularly advanced economies, offers healthier trade prospects. Pakistani exports could also benefit from this evolving dynamic, if the exporters are able to diversify their products at competitive prices.

The Annual Plan fiscal year 2018 projects exports to grow by 6.8 percent, with an impetus coming from removal of supply-side bottlenecks and a better performance by the industrial sector. The import bill is likely to rise by 7.6 percent (according to the Annual Plan fiscal year 2018) due to a surge in demand for machinery and equipment. However, the impact of such imports on the external balance would remain muted due to availability of financing from International Financial Institutions and other bilateral sources.

The State Bank of Pakistan (SBP) has suggested regulatory measures to reduce unnecessary imports and rationalization of domestic POL prices with international rates to create financing space for critical goods imports.

Pakistan’s external account has come under pressure due to an unfavorable trade balance during this fiscal year. Pakistan’s overall external balance recorded a deficit of $ 1.6 billion in Jul-Mar fiscal year 2017, against a surplus of $ 1.1 billion in the same period last year. This was mainly caused by a large trade deficit on the back of high imports without a matching performance by exports, the report said. A huge rise in imports alongside a decline in exports contributed to the widening deficit.

The trade deficit widened by 38.5 percent year on year during Jul-Mar fiscal year 2017 to $23.4 billion, against $16.8 billion in the same period last year.

A large share of imports is geared for growth-oriented activities, sluggish exports are more worrisome. To rectify this imbalance, the private sector also needs to take the lead, by demonstrating an entrepreneurial spirit and investing in physical and human capital, in order to offer more competitive products in international markets.

The changing global economic scenario also offers enhanced trade prospects, as the International Monetary Fund (IMF) now projects a brighter outlook for advanced economies. Pakistan can capitalize on these opportunities if it pursues long-lasting structural reforms, while private businesses in the country do a fundamental rethink about the way they operate and prioritize long-term growth over short-term profits.

According to SBP, market analysts believed that foreign investor activity at the bourse in the short-term will be mainly driven by passive foreign funds, as the country formally rejoins the Morgan Stanley Capital International’s (MSCI) Emerging Market Index in June 2017

After clearly pointing towards the growing current account deficit as a source of serious concern in the fiscal year, its third quarterly report released just after the Eid holidays omits all expressions of alarm.

This is surprising because the rise in the current account deficit is most pronounced in the quarter. In fact, it is the highest quarterly deficit posted by the economy since the second quarter of 2009. SBP also confirmed that the PKR-US$ exchange rate in the interbank market depreciated by 3.1 percent.

According to State Bank, while almost all macroeconomic indicators have been showing encouraging picture, such as decade-high real GDP growth, increase in investment, credit expansion to private sector, and subdued inflation; the deficit in the external account has been rising for some time.

SBP also believes that the current exchange rate is broadly aligned with the economic fundamentals. SBP will continue to closely monitor the developments in the foreign exchange markets and stands ready to ensure stability in the financial markets. It is believed the current depreciation is mainly due to rising current account, which reached $8.9 billion in July-May fiscal year 2017 compared to $3.2 billion same period of last fiscal year largely attributed by increase in goods trade deficit of $23 billion.

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