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ISLAMABAD: The State Bank of Pakistan (SBP) said on Wednesday that economy posted a growth rate of 5.8 per cent for the year 2017-18, the highest in the last 13 years, though the growing deficits threaten to swamp this growth. The observations were made in the Third Quarterly Report on the State of Pakistan’s Economy of the State Bank.

The growth was on higher side, but fell short of target of 6pc for the year. This will be the fifth year in a row that the PML-N government has missed the annual economic growth rate target, though it has presided over a revival of real sector growth.

However, the growth recorded in the outgoing fiscal year is the outcome of benign inflationary environment and improved law and order situation, which boosted business sentiments, resulting in higher credit off-take especially for fixed investment, the report says.

The report pointed out that improvement in the crops sub-sector, especially cotton and sugarcane, paved the way for agriculture to surpass last year’s performance.

Noteworthy contributions from construction- allied industries owing to CPEC and higher development spending resulted in a 10-year high growth of the industrial sector. In particular, better performance of large-scale manufacturing activity was supported by robust domestic demand, improved business environment and capacity expansions in some of the industries.

Strong activity in the commodity-producing sectors also led to the services sector maintaining its growth momentum.

The report cited that sufficient supply of key food items, such as wheat, sugar and rice, resulted in subdued food inflation, which helped to partially offset the higher non-food inflation. The report also observed that the effects of rupee depreciation on inflation came into play during the third quarter FY18.

As inflationary expectations accumulated, SBP increased the policy rate in January 2018.

The report suggests the sustainability of current growth momentum rests on effectively managing the internal and external gaps. On the external front, there is a need to arrange external financing in the short-term, and resolve structural issues affecting competitiveness in the medium and long term.

On the fiscal side, the rationalizing of expenditures may help reduce some stress temporarily, the reforms are needed to expand the tax base and enhance the efficiency of the tax system to put the internal finances in order, said the report.

Elaborating the performance of the third quarter on the external front, the report noted that despite a recovery in exports and remittances, a rebound in global oil prices, and higher transport and machinery imports led to a current account deficit of US$ 12.1 billion — the highest seen during Jul-March of a fiscal year.

Even though financial inflows were higher in Jul-March FY18 than last year, they were still insufficient to finance the current account deficit.

Resultantly, SBP reserves dropped to US$ 11.6bn by end-March, and the rupee depreciated by 9.6pc cumulatively during Jul-March FY18.

On the fiscal side, the report highlighted the increase in fiscal deficit to 4.3pc of GDP during Jul-March FY18, surpassing the full-year target of 4.1pc.

Sharp increase in both current and development expenditure, largely emanating from jump in provincial spending, amid slower growth in third quarter of FY18, drove the higher deficit.

The revenue growth decelerated, primarily due to a slowdown in direct tax collection on account of lower banks’ profitability and voluntary payments. Factors such as higher external borrowings and revaluation impact also made matters worse for the government in the face of rupee depreciation.

Published in Dawn, July 12th, 2018