Daily Briefs

Photo : Dawn

7 January 2020, Tuesday

"Achieving the real GDP growth target of 4 per cent appears unlikely": State Bank of Pakistan

Also says, "based on the sluggish start during the first quarter, it appears that achieving the annual targets for agriculture and industry may prove to be challenging."

PR Daily Brief | D. Suba Chandran

7 January 2020, Tuesday

What happened?

The first quarterly report of the State Bank of Pakistan (SBP) for FY20, in its overview though starts positively that "so far, the policy mix appears adequate to address the macroeconomic imbalances and push the economy towards stability" but has concluded that "achieving the real GDP growth target of 4 per cent appears unlikely." 

On the specific sectors, the report also says, "based on the sluggish start during the first quarter, it appears that achieving the annual targets for agriculture and industry may prove to be challenging."


What is the background?

The GDP growth rate during the last financial year for Pakistan was 3.3 per cent. For 2020, the PTI government set to achieve 4 per cent growth rate. After so much of internal debate, the government had approached the IMF. Earlier, the government also had approached China and Saudi Arabia to bail out Pakistan's economy.

The PTI government has been making multiple claims during the recent months regarding an economic turnaround in 2019. The latest SBP report, however, has made the above assessment, based on the following developments in major sectors of Pakistan's economy. 

At the outset, the SBP reports states, "macroeconomic stabilization process picked up momentum with the initiation of the IMF's Extended Fund Facility program." However, sectoral wise analysis of the economy presents the harsh reality for Pakistan. In the agriculture sector, the SBP reports states that the "revised estimates for the kharif season suggest that the production of important crops is likely to fall short of targets for FY20." 

On the industrial sector, according to the report, there was a deepening in the decline of large-scale manufacturing during the first quarter. According to the report, the "impact of macroeconomic stabilization policies and the second-round impact of exchange rate depreciation contributed to both supply-side pressures (expensive inputs) and lower demand (marginal growth in real incomes) for domestic industries. With the increase in financial and operational costs, a number of industries, including steel, automobiles, chemicals and cement, cut their production. Furthermore, the government's policy to shift away from furnace oil for power generation forced local refineries to scale back their operations." 

On the positive side of the industrial sector, the report considers that the textile and leather industries performed relatively better, and the fertilizer production benefited from the improved supply of natural gas.

On the services sector, the report feels that the wholesale and retail trade activities were relatively subdued. In the transport sector, there was an all-round decline during the first quarter relating to vehicle sale.

On inflation, the report has to make the following observation: "inflation recorded a broad-based increase of 11.5 percent during the quarter – the highest quarterly inflation since Q4-FY12. Importantly, the contribution of core inflation remained more or less unchanged at last year's level, which indicated softening demand pressures in the economy amid the ongoing macroeconomic stabilization efforts. However, the increase in food and energy inflation pushed up the overall inflation."

On the fiscal sector, the report has made a few positive observations. There was a marked improvement in Q1-FY20, according to the report, explained through "a strong growth in revenue collection and containment of current expenditures" which has "helped reduce the fiscal deficit to 0.7 percent of GDP (the lowest in 15 quarters), compared to a deficit of 1.4 percent last year."

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