KARACHI: The overall economic environment continues to remain conducive for growth on the back of accommodative monetary policy, increase in development spending and the China-Pakistan Economic Corridor (CPEC)-related activities, the State Bank of Pakistan (SBP) said on Friday.

In its second quarterly report for 2016-17 on the state of the economy, the SBP said the improvement in investors’ confidence is reflected in an uptick in private-sector credit, especially for fixed investment purposes, foreign interest in Pakistani companies and increased production of consumer durables.

Similarly, a surge in the import of machinery and raw materials also points to a robust industrial activity and build-up of future productive capacity. According to the report, growth in large-scale manufacturing (LSM) recovered in the second quarter with an increase in the production of food, cement, steel, pharmaceuticals, automobiles and electronic industries.

Growth in the agriculture sector is also expected to rebound on account of higher production of cotton, sugarcane and maize and increased prospects for wheat harvest. The report highlights that the current account deficit has almost doubled compared to the last year. This was due to a surge in growth-inducing imports along with non-realisation of the Coalition Support Fund (CSF) and a decline in exports and remittances.

The report acknowledges that foreign inflows — foreign direct investment (FDI), loans and sukuk issuance — were little more than sufficient to finance a higher current account deficit. The report highlights the need to contain the current account deficit to manageable levels to sustain external sector stability.

It also notes that fiscal deficit has increased due to low revenue generation amid higher development and security-related spending. While it terms the sustained increase in development spending commendable, it also underscores the need to enhance revenue collection.

The report shows that average CPI inflation has risen from 2.1 per cent in the first half of 2015-16 to 3.9pc in the comparable period in 2016-17, which reflects higher domestic demand and an increase in global commodity prices. However, it highlights that on a year-on- year basis CPI inflation has fluctuated in a narrow range during this period.

The report expects growth to maintain the upward trajectory while inflation is likely to remain below the target in 2016-17.

Published in Dawn, April 1st, 2017