KARACHI: The State Bank of Pakistan (SBP) said on Friday that prospects for economic growth remain strong, noting that the economy is poised to achieve the growth target of six per cent for 2017-18.

In its first quarterly report on the state of the economy, the SBP said rising income levels of consumers are fuelling retail sales and commercial activities.

However, there was an urgent need for finding more avenues for foreign exchange earnings and realigning policies favouring exports growth by addressing long-term structural impediments.

“For the external sector, recent gains in exports growth and foreign direct investments (FDI) while significant were not enough to contain the overall balance-of-payments deficit,” said the report.

It added that the widening of the current account deficit associated with increased economic activity is a recurrent phenomenon in Pakistan and has undermined maturing growth cycles in the past.

While the report expressed satisfaction over the increased revenue in the first quarter of 2017-18, it said that earlier efforts aimed at increasing the tax base need to be more concerted and perhaps require new, innovative methods.

Says recent gains in exports ‘not enough to contain’ BoP deficit

The report raised the question whether the economy is doing well enough to sustain the virtuous equilibrium of high growth-low inflation into the medium and long terms. The report stressed the need for addressing the long-standing structural reforms in the fiscal and the external sectors for sustainability.

The report analysed the recent growth in exports and identified three reasons for it. Uninterrupted energy supplies to the manufacturing sector, increasing global demand and commodity prices and the recent exchange rate deprecation.

What stands out is the role of a benign inflationary environment for some time now that has helped spur the expansion in economic activities. Low and stable prices have facilitated and eased the process of economic decision-making.

“More tangibly, falling inflation along with healthy agriculture output and stable exchange rate has resulted in higher real rural incomes and urban wages. The resultant boost in consumption forms an integral part of the current economic growth paradigm,” said the report.

Low inflation has also allowed the SBP to cumulatively cut the policy rate by 425 basis points since the autumn of 2014.

The report suggested that average inflation in 2017-18 would remain below its annual target of 6pc.

However, there are two major risks to this inflation forecast: first, recent exchange rate depreciation through expectations channel and, after some lag, through the higher imported goods’ price can seep into domestic prices; second, uncertain global oil prices pose both upside and downside risks.

The report said in the first quarter, the fiscal deficit was 1.2pc of gross domestic product, lower than 1.4pc recorded in the corresponding period of the last year.

Total revenue recovered strongly, showing an 18.9pc increase in the three-month period against an 8pc decline in the same period a year ago.

“Against this, consolidated federal and provincial expenditures grew 12.8pc compared to 2.8pc increase in the same period last year,” said the report.

Published in Dawn, January 20th, 2018