KARACHI: Achieving annual fiscal deficit target of 3.8 percent of GDP in fiscal year 2016-17 (FY17) would be challenging. It will require additional fiscal consolidation efforts on the part of the government.
The current account deficit is expected to remain in the range of 1-2 percent of GDP in FY17, which is higher than the earlier forecasts, says State Bank of Pakistan in its First Quarterly Report for FY17, released here on Friday. The preliminary macroeconomic data signals a stable growth momentum during the year, FY17, SBP report contends.
The report also noted the increase in the average headline CPI inflation from 1.7 percent in Q1-FY16 to 3.9 percent in Q1-FY17. This increase was expected as inflation had already dipped to ultra-lows last year; further push came from supply-side factors, which included a gradual rise in international prices of some key commodities. For the full-year, the CPI inflation is expected to remain within the target of 6 percent for the year, the report said.
A strong growth in sugarcane and maize production, improved production of cotton, and better supplies of minor crops suggest some recovery in the agriculture growth. While acknowledging the subdued performance by large-scale manufacturing (LSM) in Q1-FY17, the report expected that the growth would gain some pace going forward, on the back of supporting policies and encouraging outlook for automobile, sugar, pharmaceuticals and construction-related sectors.
According to the report the sluggish performance of LSM appears quite surprising given the sustained growth noted in many of its sub-sectors (e.g., automobile, fertilizer, pharmaceuticals and construction-related industries). A number of developments explain this apparent disconnect. In the case of textiles, the largest sub-sector in LSM, supply constraints (as cotton production remained low for the second consecutive year) and continued weak demand from China and some advanced economies, reduced the domestic production, particularly of low value added products (e.g., yarn and cloth).
The outlook on remittances has been marginally lowered, as the expected recovery in inflows from the seasonal slowdown in July 2016 has not materialized yet. Furthermore, remittances from the GCC countries, which contributed over 60 percent of total remittances, have declined on YoY basis during Jul-Nov FY17, due to fiscal consolidation measures being undertaken in the region. Similarly, remittances from the UK fell mainly due to the sharp depreciation of the pound against the US dollar following Brexit.
According to the report, the large retirement of private sector credit in Q1-FY17 was commensurate with an extraordinary off-take during the month of June 2016. Moreover, a few large corporates also remained shy from borrowing despite the historic low interest rates. A positive development, however, was the higher loan demand for fixed investment purposes, particularly for energy-related capital expenditures.
The report highlighted the increase in fiscal and current account deficits in the first quarter, and pointed out that this YoY increase was driven primarily by the absence of inflows under Coalition Support Fund (CSF). In case of the current account, additional pressure came from a widening trade deficit (with rising imports and declining exports) and a fall in workers’ remittances – the first such decline in the past 14 quarters.
The report added that, the downward revision in export growth projections has come on the back of renewed concerns about demand conditions in advanced economies; and a further weakening of export prices for basmati rice. On fiscal side, the report noted that the decline in non-tax revenues and lower than expected tax collections, contributed towards a rise in the deficit during Q1-FY17. However, the report appreciated the marginal decline in current expenditures following the cut down in subsidies by the government.
Interest payments remained unchanged as the gains realized from low interest rates were largely offset by an accumulation of public debt stock. Furthermore, the report also positively views the increase of 12.4 percent YoY in development expenditures, especially by provinces that scaled up their infrastructure spending during the quarter.
About the growth outlook the SBP report said that the GDP growth was expected to strengthen further during the year. While the cotton crop missed its target by a significant margin, an increase of 6.3 percent in its production would still translate into higher growth for agriculture. Furthermore, the better supply situation of fruits and vegetables; and steady increase in the global prices of cotton and sugar, are key positives for growth outlook. However, the performance of the upcoming wheat crop, which contributes over 40 percent of the value addition by the major crops, would be an important determinant of agriculture performance during FY17.
The report reiterated the role of private businesses for higher growth. In particular, fiscal incentives announced by the government in the FY17 budget and a historic low policy rate offer private businesses an opportunity to demonstrate that they can compete with their peers in other emerging markets and contribute to the growth momentum of Pakistan’s economy.
Thus, the external debt of public sector increased by $1.0 billion and reached $58.8 billion by end-September 2016. As mentioned earlier, this rise came mainly due to long-term commercial loans of $700 million (from China). The government also made a net retirement of $ 315 million short-term commercial loans during the quarter. The substitution of short-term loans with long-term debt would improve the maturity profile of the external debt.
