KARACHI: The country’s macroeconomic environment was ‘challenging’ during the first quarter of this fiscal year mainly due to rising inflationary pressures, contracting large-scale manufacturing (LSM), macroeconomic imbalances said the State Bank of Pakistan (SBP) in its 1QFY19 report on the State of Economy.

The report calls for an urgent need to ‘initiate and expedite’ structural reforms to “address the recurring macroeconomic imbalances… push the economy’s productivity frontier,” warning that “the country would continue to move along the macroeconomic adjustment path for some time.”

The SBP notes that the rising global crude prices in the first quarter of the fiscal year (July to September 2018) not only eclipsed the improvements in external sector but worsened the lingering inflationary pressures, following the second round of higher fuel prices and lagged impact of exchange rate depreciation impacting the broader economy. Moreover, the LSM also contracted by 1.7 per cent during the quarter, versus a growth of 9.9pc in 1QFY18. Noticeably, the output of construction-allied and consumer durable segments, which were the major drivers of growth last year, decelerated on a year-on-year basis.

Pointing out the mismatch between revenues and expenditures, the SBP says even after the 45.5pc drop in public sector projects, the fiscal deficit remained high, clocking in at Rs541.7 billion, recording a jump of Rs100bn from same period last year. The expenditures grew by 11pc during the quarter compared to 13.5pc in corresponding quarter last year. The financing burden fell largely on the State Bank, as well as non bank financial institutions. The consolidated revenues grew by 7.5pc during the quarter as against 18.9pc in first quarter last year.

Highlighting external pressures, the report remarks that the current account deficit declined slightly for the first time in two years, “ it stayed at an elevated level of $3.6bn” during the quarter. The deficit was mainly on account of the worsening terms of trade and more than 51pc increase in the global crude prices increasing the import bill.

The quarterly import bill crossed the $4bn mark for the first time since 1QFY15, the report says. With foreign investments declining on a yearly basis and external borrowing by private sector remaining subdued, the financial inflows proved insufficient, and the current account deficit had to be financed from SBP reserves, which declines by $1.4bn, putting pressure on the exchange rate.

The publication adds that amid “slowdown in economic activities, SBP shored up its stabilisation efforts and tightened the monetary policy during the quarter. In each of the two policy decisions that were held during the period, Monetary Policy Committee increased the policy rate by 100 basis points each time. These decisions were guided primarily by the prevalence of high twin deficits as well as the increased likelihood of headline inflation surpassing the annual target of 6pc.”

In private sector credit, the SBP says “the impact of input prices (especially cotton and crude oil) on the overall credit off-take can be seen from the near doubling of average loan size in first quarter … implying that a substantial part of the higher off-take was price driven.”

The central bank acknowledged the rising challenges in debt and monetary management due to behavioural interplay between scheduled banks and the government noting that “from the monetary management’s perspective, near-flattening of the yield curve and excessive government borrowings from SBP posed major challenges.”

However, in order to revert to a stable macroeconomic environment over the medium term, the report underlined the importance of continuation of the right mix of polices laying particular emphasis on initiating the structural reforms in order to take the growth momentum forward.

Published in Dawn, January 30th, 2019