SBP re­port

The Pak Banker - - FRONT PAGE -

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.

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