The State Bank of Pakistan has broken the news that the national economy is set to surpass last year's decade high growth of 5.3% in the current fiscal year 2017-18, propelled by strong demand mainly for automobiles, electronic equipment, steel, cement and other construction material. In the second quarterly report for FY18 on the state of Pakistan's economy, it says that large-scale manufacturing (LSM) growth touched a four-year high in the first half as upbeat demand for consumer durables and construction input induced manufacturing firms to flex their capacities. Credit flow to private sector recovered strongly from mid-January 2018 and increased by Rs167.9 billion between January 12 and March 16 compared to credit expansion of Rs60.3 billion in the corresponding period of previous year. In its economic outlook, the central bank said there was some relief that the seven-month-long oil price rally came to an end in February 2018 when the commodity shed 11% of its value.
Reviewing the economic progress in first half (Jul-Dec 2017) of FY18, the central bank said while the real sector of the economy presented an encouraging picture, the external account remained a cause for concern from the macroeconomic stability standpoint. According to SBP, the economy will remain at risk of a widening current account deficit, which is a combination of exorbitant oil imports, significantly maturing external debt repayments and slightly lower worker remittances in the remaining three months of FY18. Consequently, the deficit will continue to eat into the foreign exchange reserves, increasing dependence on short-term international borrowing.
As is well known, risks to overall macroeconomic stability have increased due to widening imbalances in the country's balance of payments. Reserves have already fallen to less than three months of the country's import bill. The central bank has predicted that inflation would remain in the range of 4.5-5.5% against the target of 6% mainly due to low food prices. It stood at 4.2% last year. Pakistan may attract maximum remittances of $20.5 billion from overseas workers in FY18 that would be slightly lower than the target of $20.7 billion. Imports may shoot up to $54.3 billion against the target of $48.8 billion mainly due to heavy oil imports and imports of textile and steel inputs. At the same time, exports may also surpass the target of $23.1 billion to a maximum of $24.6 billion. However, the growth would remain insufficient to finance the gap in current account deficit.
The outlook of global oil prices looks much stable now as the rapid increase in shale production by the US is likely to outweigh anticipated pickup in global oil demand. If these expectations materialise, then at least the price component of Pakistan's energy bill may be less of a concern going forward. From inflation perspective, the stability in global oil market will be crucial. Since the end of December 2017, the government has increased domestic petrol prices by Rs11 per litre (13.7%) to pass on the impact of high import cost as well as rupee depreciation (9.5% from Dec-17 to Mar-18).
Despite much-needed recovery in exports, Pakistan's balance of payments continued to reel under the pressure of surging imports. The current account deficit increased to $7.9 billion in 1HFY18 from $4.7 billion in the same period of last year. Higher financial inflows compared to last year proved insufficient to rein in the decline in the country's foreign exchange reserves. With the drop in private and official financial inflows, the burden of financing the current account fell on the foreign exchange reserves. The above analysis shows that a tighter management of the economy will be needed in the coming days.