KARACHI: Real GDP growth is expected to surpass last year’s decade-high growth rate of 5.3 per cent but will remain below the target of 6pc with four-year high large-scale manufacturing (LSM) growth and low inflation, the State Bank of Pakistan said on Friday.

In its 2nd quarter report on “State of Pakistan’s Economy”, the central bank noted that LSM growth decelerated to just 1.6pc in the second quarter of FY18 compared to 9.9pc growth achieved in the first quarter.

LSM growth touched a four-year high during first half of FY18 as upbeat demand for consumer durables and construction inputs induced manufacturing firms to flex their capacities; an improved performance by all the major sectors pushed up the import demand.

The report said that overall fiscal deficit is likely to exceed the target for FY18, despite an improvement in revenue growth. Overall fiscal deficit was contained at 2.2pc of GDP, down from last year’s 2.5pc during the first half of FY18.

Inflation remained low and fiscal position consolidated on the back of a rebound in revenue collection.

However, the report said that the growth in revenue collection outpaced the increase in expenditures in the first half (H1) of FY18 which led to a broad-based improvement in fiscal indicators.

External pressures mounting, arranging official inflows now critical

While the government’s development spending in H1-FY18 was higher than last year, the overall fiscal deficit has been well contained, said SBP, adding the lower budgetary borrowings, coupled with a lower off-take of private credit, contributed to a slowdown in the growth in money supply.

Importantly, core inflation, which reflects the underlying demand pressures in the economy, stabilised in H1-FY18 after increasing steadily over the past seven quarters, it added.

“The overall current expenditures are also likely to remain high because of expected election-related spending,” said the report.

Agriculture is expected to perform well, as a number of major crops gained from both an increase in area under cultivation as well as improving yields, said the report adding that the wheat production came under pressure due to non-availability of sufficient water, and a reduction in area under cultivation as compared to last year.

The report said the expectations are that the full-year growth in sugar production will remain lower compared to the previous season. Still, the overall LSM numbers may be stronger than last year on the back of expected buoyancy in consumer durables and construction-allied industries.

“In contrast, agriculture growth is likely to remain lower than last year, as well as the target set for FY18,” said the report.

This assessment is primarily based on an expected shortfall of 2.5 million bales in cotton production, as well as below-target area under wheat cultivation.

“In this context, GDP growth is likely to remain slightly below the target of 6pc,” said the SBP report.

On the external front, the strengthening demand for imported products in western markets, along with the PKR depreciation and the government’s policy support for exporters, are all positive signs, said SBP report. Following a healthy 16.4pc growth in the month of February 2018, the cumulative export growth in Jul-Feb FY18 has reached 11.7pc.

“If exports continue to grow at the same pace for the remaining months, the target of $23.1 billion can comfortably be surpassed,” said the report.

“However, risks to overall macroeconomic stability have increased due to widening imbalances in country’s balance of payments,” said the report.

Given the expected volume of current account deficit in coming months along with size of maturing loans, it has become imperative for the government to ensure that estimated official inflows for the remaining part of the year are realised, said the SBP report.

Debt sustainability issues may prop up going forward, and this brings into equation the need for a sustainable stream of foreign exchange earnings in the future, as well as the increase in country’s debt repayment capacity, the report said.

“The latter ultimately hinges upon a perceptible improvement in the country’s tax base, and decisive actions to address critical issues like falling number of direct tax payers, recurring circular debt, and costly support price mechanism in the commodity market.”

Published in Dawn, April 7th, 2018