SBP re­port

The Pak Banker - - FRONT PAGE -

Ac­cord­ing to the State Bank an­nual re­port, FY18 ended with a mixed per­for­mance of the econ­omy. The growth mo­men­tum gained fur­ther strength as the econ­omy achieved its 13- year high­est real GDP growth of 5.8 per­cent in FY18 and in­fla­tion re­mained be­low the tar­get for the fourth con­sec­u­tive year. How­ever, a sharp de­cel­er­a­tion in rev­enue growth com­pared to ex­pen­di­tures and in­creased de­pen­dence on im­ports to meet grow­ing do­mes­tic de­mand led to widening in the twin deficits to un­sus­tain­able lev­els. While the fis­cal deficit was the high­est dur­ing the last five years lead­ing to faster ac­cu­mu­la­tion in pub­lic debt, es­pe­cially the ex­ter­nal debt, the record cur­rent ac­count deficit led to in­creased pres­sures on for­eign ex­change re­serves and ex­change rate.

The GDP growth in 2017- 18 was broad- based in the sense that all the three ma­jor sec­tors showed ro­bust per­for­mance and was sup­ported by a host of fac­tors, in­clud­ing low cost of fi­nanc­ing, im­proved en­ergy sup­plies, favourable busi­ness sen­ti­ments, fis­cal in­cen­tives through sub­si­dies and higher pub­lic spend­ing and progress on CPEC- re­lated projects. How­ever, strong do­mes­tic de­mand also played a key role in push­ing up growth. CPI in­fla­tion was be­low the an­nual tar­get for the fourth con­sec­u­tive year dur­ing FY18 and clocked in at its sec­ond low­est level since FY03. Prices were up by 3.9 per­cent in FY18 com­pared to 4.2 per­cent last year. The pol­icy rate was in­creased by a cu­mu­la­tive 75 ba­sis points dur­ing the year, af­ter keeping it un­changed for the last two years. The main fac­tors lead­ing to this re­ver­sal in the pol­icy rate in­cluded grow­ing macroe­co­nomic im­bal­ances, im­pact of ex­change rate de­pre­ci­a­tion on in­fla­tion, in­suf­fi­cient fi­nan­cial in­flows, sharp in­crease in global oil prices and high­erthan- ex­pected fis­cal gap.

Sig­nif­i­cantly, bud­getary bor­row­ings from the bank­ing sys­tem re­mained high dur­ing FY18. Not only did the govern­ment rely on SBP fi­nanc­ing and bor­rowed about Rs 2.2 tril­lion in Q3- FY18 alone, it also breached the "zero quar­terly bor­row­ing" limit as pre­scribed un­der the SBP Act. Fis­cal ac­counts con­tin­ued to de­te­ri­o­rate for the sec­ond con­sec­u­tive year. Fis­cal deficit rose to 6.6 per­cent of GDP dur­ing FY18, sur­pass­ing both the 4.1 per­cent tar­get for the year and 5.8 per­cent dur­ing the pre­vi­ous year. Com­pared to an 8.8 per­cent in­crease in FY17, pub­lic debt in­creased by 16.5 per­cent dur­ing FY18. The gross pub­lic debt also rose to 72.5 per­cent of GDP at the end of June 2018 from 67.0 per­cent at the close of FY17, re­main­ing sig­nif­i­cantly higher than the 60 per­cent limit en­vis­aged in the Fis­cal Re­spon­si­bil­ity and Debt Lim­i­ta­tion Act, 2005.

De­spite in­crease in ex­ports and mod­est re­cov­ery in re­mit­tances, the cur­rent ac­count ( C/ A) deficit rose to a his­toric high of dol­lar 18.1 bil­lion dur­ing FY18. Fi­nan­cial in­flows were in­suf­fi­cient to finance this deficit. As a re­sult, for­eign ex­change re­serves held by the SBP dropped by dol­lar 6.4 bil­lion dur­ing the year, reach­ing dol­lar 9.8 bil­lion by the end of June, 2018 and lead­ing to de­pre­ci­a­tion of the ru­pee by 13.7 per­cent dur­ing the year. As for the prospects for FY19, some of the re­cent pol­icy mea­sures like mon­e­tary tight­en­ing, ex­change rate de­pre­ci­a­tion, reg­u­la­tory du­ties on im­ports and a cut in de­vel­op­ment spend­ing are likely to dampen do­mes­tic de­mand and con­tain fis­cal deficit. These de­vel­op­ments would also have im­pli­ca­tions for in­fla­tion and growth go­ing for­ward.

Ac­cord­ing to the SBP, the GDP growth tar­get of 6.2 per­cent for FY19 ap­pears am­bi­tious and it may fall in the range of 4.7 to 5.2 per­cent. Keeping in view a va­ri­ety of mea­sures and de­vel­op­ments, the C/ A deficit was pro­jected in the range of 5 to 6 per­cent of GDP as com­pared to 5.8 per­cent in FY18. The ad­min­is­tra­tive rev­enue mea­sures, in­crease in the reg­u­la­tory and fed­eral ex­cise du­ties, a re­duc­tion in de­vel­op­ment spend­ing and aus­ter­ity mea­sures are ex­pected to con­tain the fis­cal deficit in the range of 5 to 6 per­cent of GDP dur­ing FY19.

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