Economy picking up; inflation behaving despite challenges

SBP says strong LSM output to bolster growth

KARACHI: Pakistan’s economy will pick up further during the second half of the current fiscal year thanks to the stable growth in large scale manufacturing sector on the start of multibillion rupees resource projects and a good winter rains this season that will bolster agriculture production, the central bank said on Thursday.

“Despite challenging global economic conditions, Pakistan’s overall macroeconomic outlook appears stable,” the State Bank of Pakistan said in its ‘Second Quarterly Review on the State of Pakistan’s Economy’. “Growth is likely to pick up… fiscal position is strong; inflation is likely to stay low and ricks on the external front have been moderate to a large extent.”

The bank, however, kept its growth forecast unchanged at 4-5 percent for the current fiscal year of 2015/16. The SBP’s growth forecast is still below than the government target of 5.5 percent. The economy grew at a rate of 4.2 percent in the last fiscal year ended June 2015.

The central bank said a stable macroeconomic environment means that the economic growth would maintain the momentum.

“We expect GDP growth during the FY16 to be higher than the last fiscal… We are optimistic on the industrial sector’s performance but cannot firmly assess the final outcomes in agriculture and services,” the SBP said.

It said the growth momentum in large scale manufacturing (LSM) continued to remain strong in the first half of the current fiscal year, supported by better energy supplies, lower commodity prices and accommodative polices.

The LSM sector grew 3.9 percent in the first half of the current fiscal against 2.7 percent in the previous year of the same period. Major contribution to LSM growth came from auto, fertiliser and construction allied industries.

On the agriculture sector performance, the central bank said the prospects of surpassing targets in wheat and value addition in livestock are strong.  “While initial estimates suggest a decline in area under wheat cultivation, a marked improvement in yields has increased hopes for a bumper for a third year in a row; timely rains and better input availability have reported improved the per-acre harvest,” the bank said.

The SBP, however, also said overall growth does not portray a very encouraging picture in agriculture sector. “Preliminary estimates suggest that all Kharif crops have missed their respective targets; cotton and rice did not achieve last year’s production level.”

The central bank highlighted the public debt servicing obligations, which were not more than six billion dollars per annum until 2020. “Debt servicing of $5 billion due on 2016 are well within manageable level considering the present level of foreign exchange level,” the central bank said.

The SBP estimated the current fiscal year’s inflation at 3-4 percent below the target of six percent. “The global commodity prices are not expected to recover anytime soon, and on the other, a stable Pak Rupee is likely to keep inflation expectations further at bay,” it added.

The central bank maintained the lower inflation estimates on the government move to reduce domestic petrol prices by 6.6 percent and 11.9 percent in February and March 2016, respectively, following the freefall of oil prices to a 12-year low level in the international market.

The bank said measures taken by the government in October 2015 would help the Federal Board of Revenue to maintain revenue collection growth. Expenditures will remain within target, it added.

The pattern of lower borrowing from financial institutions would remain same in the second half of the current fiscal year as the government is expecting more external funding down the road, the SBP said.  “The lower borrowing helped the increase in private sector credit off-take, which bodes well for the industrial sector performance,” it said. The SBP reviewed the first half of current fiscal year in which Pakistan had faced both positive and negative effects due to prevailing global conditions.

It said that the decline in oil prices allowed a 39.8 percent fall in the country’s oil import bill, helping reduce the trade deficit by 1.6 percent in the first half. Furthermore, the pass-through of low prices by the government has contributed in pushing down the consumer price index inflation to a multi-decade low.

Together, the low inflation expectations and stability on the external front allowed SBP to cut the policy rate to its historically low level of six percent in September 2015; this has spurred up demand for private credit, especially for fixed investment purposes, according to the review.

On the flip side, the commodity recession has impacted the performance of crop sector, as the sowing area declined for many crops this season. “The cotton crop has been particularly affected, as its production is down also because of pest attacks and heavy rainfall,” the SBP said and added that the biggest impact of the global slowdown was seen on the country’s exports.