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GDP growth shrinks as twin deficits dampen output: SBP

Updated July 16, 2019

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“These trends have yet again exposed Pakistan’s structural deficiencies," says SBP. — APP/File
“These trends have yet again exposed Pakistan’s structural deficiencies," says SBP. — APP/File

KARACHI: The country’s gross domestic product (GDP) moderated to 3.3 per cent in FY19 amid deteriorating fiscal deficit and relatively improved current account deficit despite doubts regarding its sustainability, said State Bank’s third quarterly report for FY19 issued on Monday.

“These trends have yet again exposed Pakistan’s structural deficiencies and its vulnerabilities to the build up of external and internal deficits,” said the SBP report.

“The pace of economic growth slowed down considerably during FY19. This was mainly in response to the policy measures taken to curb the twin deficits. These measures affected the performance of the industrial sector and dampened manufacturing activities in the country,” it added.

Large Scale Manufacturing (LSM) posted a broad-based 2.9pc decline during Jul-Mar FY19, with nearly all leading sectors reporting contraction.

On the other hand, silver lining during the period under review was the livestock segment, which maintained its growth momentum from last year and ultimately pushed the agriculture sector’s overall growth marginally into the positive territory.

“The services sector lost some of its growth momentum from last year, registering a growth of 4.7pc during FY19 as compared to 6.2pc in FY18,” said the report.

Adverse developments such as water shortages and high input costs undermined the agriculture sector’s performance, whereas the less tangible factors such as uncertainty regarding decision on the International Monetary Fund program for balance of payments support hampered the overall business sentiment.

“During Jul-Mar FY19, fiscal deficit further deteriorated while the current account gap relatively improved, its sustainability remained a concern,” said the SBP report.

The cumulative fiscal deficit during Jul-Mar stood at 5pc of the GDP, much higher than the deficit of 4.3pc recorded in the same period last year. On the expenditure front, cumulative growth stood at 8pc during Jul-Mar FY19, against 16pc last year.

The report said the consumer price index (CPI) inflation — averaging at 6.8pc in the first nine months of the last fiscal year was well above 6pc-target set by the government.

The higher-than-expected inflation ensured broad-based economic pressures as 72pc of the items within the CPI basket recorded inflation of more than the 6pc, whereas 31.5pc posted double-digit inflation.

“Despite monetary tightening, the government is projecting CPI inflation to be higher in FY20,” said the report.

This outlook is largely explained by supply-side factors, such as the upward adjustments in domestic energy prices and recent episodes of rupee depreciation along with their second-round impact, which is likely to increase the cost of production and doing business.

Additional impact is likely to come from various taxation measures taken in the budget for FY20 and the risk arising from any volatility in the international oil prices.

“While the realised bilateral inflows from friendly countries did provide some support to foreign exchange reserves, its adequacy is still below the three month of import coverage and the overall balance of payments position remained weak,” said the report.

Fiscal indicators have continued to deteriorate during the period under review despite steep cuts in development expenditures by 34pc, said the report.

The interest rate hikes and exchange rate depreciations accentuated the rigidities in the current expenditures. Making things worse, revenue mobilisation remained weak due to stagnant tax revenues and steep fall in non-tax revenues.

Although demand-pull pressures have lessened in intensity towards the end of the fiscal year, the non-food non-energy component continued to climb.

This is because its major impetus came from cost-push factors, including the second round impact of exchange rate deprecation and increase in energy prices.

Published in Dawn, July 16th, 2019