Economic activities in Pakistan have slowed down in the current financial year 2018-19 with sluggish performance of key contributing sectors, showing that the GDP growth rate is going to further decrease to 4 percent.
The State Bank of Pakistan’s quarterly report The State of Pakistan’s Economy mentions that it has revised down its projection for real GDP growth during FY19 by 0.5 percent to 3.5-4.0 percent.
Factors Affecting GDP Growth
Real GDP growth during FY19 is likely to moderate significantly, mainly due to a slowdown in the growth of the agriculture sector and stabilization measures taken to preserve macroeconomic stability. This is in line with a further contraction in LSM during Q2-FY19.
Moreover, given that public development spending, a key driver for private sector industrial activities, is unlikely to pick up anytime soon, the full year outlook for manufacturing activities remains subdued.
Furthermore, private consumption is going to remain lower due to a tighter monetary policy and pass-through of exchange rate depreciation that has resulted in both higher energy prices and core inflation. In addition, the prospects for the upcoming wheat crop remains subdued in terms of growth. All these aspects are going to constrain the services sector in the coming months as well.
Regarding price pressures, inflation is expected to remain high in H2-FY19. This is due to the second round impact of recent exchange rate depreciation, an upward adjustment in gas and electricity prices and higher budgetary borrowing from SBP. However, the impact of policy rate increases would be instrumental in keeping demand pressures in check. Acknowledging these risks, SBP continues to project average CPI inflation at 6.5-7.5 percent for the full year.
As noted earlier, the primary deficit has increased further, and there has been a sharp reduction in development expenditures in order to improve the fiscal position. This situation has become more challenging as the growth in current expenditure inched up to 17.3 percent during the first half as compared to 13.5 percent last year.
On the other hand, revenue collection has reduced by 2.4 percent during the same period as compared to a growth of 19.8 percent last year. Since there is limited room to curtail government expenditures in the coming months, growth in revenues would be instrumental in determining the overall fiscal position for FY19.
Incorporating the performance of revenue collection during the second half in the last four years, SBP projects fiscal deficit to further deteriorate by 0.5 percent of GDP to reach 6 to 7 percent of the GDP, which brings it close to the same level as in FY18. As for the external sector, while the CAD has improved by $1.7 billion during the first seven months of FY19, it is still high at $8.4 billion and will remain at over 5 percent of the GDP.
Improvement of a Few Indicators
Meanwhile, on the external financing front, the efforts of the government have started to materialize in the shape of bilateral inflows from Saudi Arabia, UAE and China. Some of these inflows have already been realized, while the rest are due in the second half of FY19.
Some improvement is expected to continue in the remaining months as imports are likely to contract further on account of moderating domestic demand and relatively low international oil price as compared to that at the beginning of FY19, the report added.
Source: Pro Pakistan