KARACHI: The State Bank of Pakistan’s hopes are high for economic growth and it praises the government’s economic strategy despite some concerns over low credit off-take by the private sector, stagnant exports earnings and poor foreign direct investments.

In its third quarterly report released on Thursday, the SBP said it had already reduced the policy rate to a historic low during the past seven months to support economic activity.

“Investment, which has been a key concern for economic growth in recent years, is likely to benefit from monetary easing and planned investment under the China-Pakistan Economic Corridor (CPEC).”

The report said that with the import of LNG, and completion of a few energy-related projects, energy supply is expected to improve. Persistently low international oil price would also facilitate energy supplies by reducing the cost of tariff rationalisation, and energy-related expenses of the businesses. The report said the construction activity was set to gain from mega infrastructure projects, and growing private sector residential projects.

“Moreover, work on road construction under the CPEC is likely to gather pace during the next fiscal year. Manufacturing sector would be a major beneficiary as the construction and allied industries are likely to gain from this increasing activity.”

It said that after a long time, the investments are expected to revive because: (a) energy shortage is likely to ease further; (b) as a result of the ongoing campaign to eradicate terrorism, the law and order situation has significantly improved; (c) positive assessment of the economy by IFIs and credit-rating agencies would help improve investors’ confidence; (d) foreign direct investment would gain from inflows under CPEC; and (e) historic low interest rates would also support investment activity.

The SBP said that the real GDP growth for FY-15 at 4.24 per cent, though lower than the target, had reached the highest level in the last seven years.

Though the central bank reduced the policy interest rate by 300 basis points in last seven months, it failed to move the private sector to benefit from the cheaper money.

The low interest rate is likely to support credit to the private sector, which grew by only 5.5pc during Jul-Mar FY15, compared with 10pc during the same period last year.

The report said the GDP growth was highest since FY08, but it fell short of 5.1pc target for the year, as most of the challenges to economic activity continued to persist.

It said that despite relatively low growth in commodity producing sectors (agriculture and industry), services managed to grow by 5pc in FY15, which was higher than 4.4pc of last year.

“Despite significant improvement in key economic indicators, there is a need to focus on some longstanding structural issues, which have been constraining the performance of various sectors.”

The SBP said the first and foremost, exports, the prime source of foreign exchange earnings for the country, had been stagnant in the recent past, and declined during Jul-Mar FY15. Secondly, as the non-debt inflows remained subdued, the country has to rely on debt inflows for the financing of current account deficit, and building up of liquid forex reserves.

“The crop sector grew by only 1pc. None of the important crops other than rice and cotton could repeat the performance of last year, let alone the target for the year. To be precise, important crops grew by only 0.3pc in FY15, compared with the growth of 8pc last year.”

It said the restraining factors were the heavy rains (floods in certain areas of Punjab) during kharif and prolonged low temperature during rabi.

It said spillover effects of weak crops (like sugarcane) were also visible from the manufacturing sector. In addition to this, subdued external demand and persistent energy shortages (albeit less severe), undermined the manufacturing during the year. Large-scale manufacturing (LSM) grew by only 2.5pc during Jul-Mar FY15, compared with the target of 7pc for the year, and growth of 4.6pc during the same period last year.

Within LSM, automobiles and construction-related industries performed better than last year.

“While the former benefited hea­vily from the introduction of new car models and the Punjab government’s Apna Rozgar Scheme, the latter gained from healthy construction activity. Construction sector grew by 7pc in FY15, on top of 7.2pc in the last year.”

The report said like FY14, commercial banks continued to channel their funds towards risk-free government securities during the year. In absolute terms, with an increase of Rs1.2 trillion in the first nine months of the year, commercial banks’ investments in government securities reached an all-time high of Rs5.3tr by end-March. The increase was almost equally distributed between Pakistan Investment Bonds and Treasury Bills.

Pakistan’s public debt stock recorded an increase of Rs933.6bn in the first nine months of the year, to reach Rs17.4tr by end-March. This was entirely driven by an increase in domestic debt, as the external debt saw a decline of Rs83bn during the year.

Published in Dawn, July 17th, 2015

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