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Pressure on external, fiscal accounts to persist: State Bank

Updated October 13, 2017


Domestic consumption has surged to 94 per cent of GDP, driven largely by households.—File photo
Domestic consumption has surged to 94 per cent of GDP, driven largely by households.—File photo

KARACHI: The State Bank of Pakistan (SBP) expects the GDP growth rate for 2017-18 will remain between five and six per cent against the 6pc growth target set by the government.

It also lowered its 6pc inflation target to 4.5-5.5pc, according to the SBP’s state of the economy report for 2016-17 issued on Thursday.

It projects fiscal and current account deficits of 5-6pc and 4-5pc of GDP against the targets of 4.1pc and 2.6pc, respectively, for 2017-18.

• Investment, exports, credit to SMEs and revenues must be key priorities • Consumption surging while investment sees ‘moderate increase’

The report said that pressure on external and fiscal accounts is expected to emanate from elevated import demand and an increase in public spending by provincial governments in particular.

“The current account deficit is projected to remain around the last year’s level i.e. in the range of 4pc to 5pc of GDP,” said the SBP.

“There is a need to contain the import of unnecessary and luxury items, meant for consumption, in order to reduce the trade deficit and narrow the current account deficit,” said the SBP.

The report suggested that Pakistan should discourage unnecessary imports to finance those of capital goods and essential raw materials to strengthen recovery in investment.

However, a 19.1pc growth in imports (freight on board), excluding machinery, indicates that a significant contribution to the overall increase in imports is coming from oil and consumer goods, including food. These trends are in line with the increase in income levels and rising share of consumption in overall GDP, the report said.

The report revealed that the share of consumption in Pakistan’s GDP increased to nearly 94pc in 2016-17. It remained around 90pc during the last 10 years. The bulk of this consists of household consumption at 81.8pc of GDP.

From the expenditure side, the major impetus to growth came from domestic consumption, which grew 8.9pc and accounted for 94pc of nominal GDP. Despite a significant increase in the imports of machinery and private-sector credit, especially for fixed investment, in 2016-17, investment as a percentage of GDP increased only marginally to 15.8pc from 15.6pc a year before.

The report highlighted four major challenges that need to be addressed to sustain expansion in the economy with low and stable inflation: switching away from consumption-led to investment-cum-export-oriented growth, reducing the current account deficit to manageable levels, alleviating credit constraints for small and medium-sized enterprises (SMEs) and enlarging the resource envelope and creating the fiscal space required to fund infrastructure and social development projects.

The report said that growth in the tax collection fell below 9.5pc growth in nominal GDP. As a result, the tax-to-GDP ratio declined to 12.5pc after rising consistently to 12.6pc in 2015-16 from the low of 9.3pc in 2009-10. The tax-to-GDP ratio in 2016-17 was also significantly lower compared to the target of 12.9pc for the year.

Total federal and provincial expenditures jumped 17.3pc during 2016-17 compared to 7.6pc increase in 2015-16. While growth in expenditures was broad-based, development expenditures grew more sharply at 30.1pc during 2016-17 – on top of the 16.9pc growth recorded in 2015-16.

Most of the expansion in development spending was concentrated in the last quarter of 2016-17 when the provinces accelerated their expenditures in a bid to complete projects, said the report. It added that total provincial expenditures increased by almost Rs1 trillion in the fourth quarter of 2016-17, which is about 40pc of the total provincial expenditures during the year.

The report said the agriculture sector is expected to repeat its performance of last year. The industry — mainly large-scale manufacturing, construction, electricity generation, and electricity and gas distribution — will continue to benefit from the ongoing work on infrastructure and energy-related China-Pakistan Economic Corridor (CPEC) projects.

“The expected improved performance of agriculture and industrial sectors will spill over to the services sector in 2017-18 as well,” said the report.

Growth in exports and workers’ remittances is expected to recover while exports are likely to benefit from a recovery in global commodity prices and ease in energy constraints. This is particularly indicated by a double-digit growth in exports recorded during the first two months of 2017-18, said the report.

“The assessment shows the economy is likely to continue to expand with low and stable inflation in 2017-18. Encouraging trends in private-sector credit indicate underlying dynamics in real economic activity,” said the SBP. However, maintaining this momentum going forward will largely depend on addressing emerging challenges in external and fiscal accounts, it added.

Published in Dawn, October 13th, 2017