KARACHI: The consumption-led economic growth of 5.8 per cent came at the cost of widening of macroeconomic imbalances as manifested in a five-year high fiscal deficit and a record current account deficit, said State Bank of Pakistan’s Annual Report 2017-18 (State of the Economy) issued on Thursday.

“Pakistan’s economy is again at a familiar juncture, with imbalances emerging as the growth picked up, making it challenging to maintain the virtuous equilibrium of low inflation and higher growth. The only difference this time is heavy investment is underway in energy and infrastructure,” said the report.

The publication noted that growth saw a reversal in FY18: development expenditures declined while growth in current expenditures accelerated; thus, the composition of expenditure shifted from investment to more consumption.

The share of consumption in the real GDP increased to 93.2 per cent during FY18 from 91.7pc in FY17 – well above the average of 88.7 per cent during the past five years. This was led by low interest rate environment, increased fiscal spending and improved real incomes, argued SBP. More specifically, lower borrowing cost continued to encourage businesses to borrow for both working capital and fixed investment purposes during the last few years.

Growth in FY18 reversed as expenditure shifted from investment to consumption

According to the report, several measures have been taken to reduce the pressures on external account and manage inflation expectations. “Increase in interest rate, adjustments in exchange rate, restriction on advance payments and imports on open account, increase in regulatory and custom duty, and imposition of cash margins on selected non-essential goods are aimed at containing imports and narrowing the current account deficit,” said the publication.

However, expansionary fiscal policy in an election year and increase in oil prices have partially offset the expected impact of these measures, it added.

The report suggests that Pakistan should increase investment through enhanced savings by promoting a saving culture, introducing new financial products and increasing public savings. The resulting decrease in overall consumption would help lower import demand in the short- to medium-term.

It further stressed that economic reforms may not be effective unless coordinated with those in other sectors. “It can hardly be overemphasised that the success of reforms would crucially depend on an improvement in governance.”

“In addition, interest payments on external debt and repatriation of profits also increased considerably during FY18, whereas absence of CSF (Coalition Support Fund) weighed on the services account. That deficit could not be offset by remittances, which grew moderately. Thus, the current account deficit reached a record $18.1 billion in 2017-18,” said the report.

Financing of this current account deficit necessitated increased reliance on external borrowings but the worrisome development was heavy dependence on commercial loans, which entail both higher interest rates and lower maturity relative to borrowings from multilateral and bilateral sources,’ said the SBP.

“As a result, the average time to maturity of external loans fell to nearly 10 years in FY18 from over 20 years in FY14,” the report points out.

The exports recorded a broad-based recovery, supported by improved energy supplies at the time of gradually picking up global demand. Moreover, export of surplus wheat and sugar coupled with higher commodity prices in international market also contributed to a double-digit growth in foreign sales, the publication continues. “Despite that, imports were still 2.3 times exports in absolute terms,” SBP concludes.

Published in Dawn, October 19th, 2018