SBP widens view of 2016/17 fiscal, current account deficits

KARACHI: The State Bank of Pakistan (SBP) on Friday widened its view of this year's current account deficit to 1.0-2.0 percent of gross domestic product from 0.5-1.5 percent forecast in November

The SBP said the country’s fiscal and current account deficits are poised to widen during the current fiscal year. “Given the revenue shortfall during Q1-FY17, achieving the annual fiscal deficit target of 3.8 percent of the GDP would be challenging , the bank said in its first quarterly report for 2016/17 on the state of economy. “It will require addition fiscal consolidation efforts on the part of the government.”

It said the y-o-y increase in fiscal and current account deficits in the first quarter was also driven by the absence of inflow under Coalition Support Fund. In case of the current account, addition pressure came from a widening trade deficit and a fall in workers’ remittances, the bank said.

“The outlook on remittances has been marginally lowered, as the expected recovery in inflows from the seasonal slowdown in July 2016 has not materialised yet,” it added.  “Furthermore, remittances from the GCC countries (which contributed over 60 percent of total remittances) have declined on year-on-year basis during Jul-Nov FY17, due to fiscal consolidation measures being undertaken in the region.”

SBP said remittances from the UK also fell after the pound sharply fell against the US dollar following Brexit. However, the report appreciated the marginal decline in current expenditures following the cut down in subsidies by the government.   

The central bank was upbeat on growth prospective, saying preliminary macroeconomic data signals a stable growth momentum during the year.  “The improved performance of sugarcane and maize; better supply situation of fruits and vegetables; and steady increase in the global prices of cotton and sugar, are key positives for growth outlook,” the SBP said.

“However, the performance of the upcoming wheat crop (which contributes over 40 percent of the value addition by the major crops) would be an important determinant of agriculture performance during FY17.”

The SBP, in its previous report, projected the economy is likely to grow at 5-6 percent during the current fiscal year. The bank said large scale manufacturing (LSM) growth “so far is fairly low compared to last year.”

“However, we expect some pick up in its pace due to continued supportive policies, like low interest rates, reduced cost of energy with improved availability, strong domestic demand, healthy corporate margins, and a conducive investment environment.”

It added that the expected recovery in LSM would also have strong spillover impact on wholesale and retail trade, which is one of the major subsectors under services. Similarly, transport sector is likely to perform well due to CPEC related activities.

The central bank sees consumer price index inflation is expected to remain within the target of 4.5-5.5 percent for the full year.

“The recent revival of global oil prices after OPEC’s agreement on oil supply may lead to higher non-food inflation. On the other hand, food inflation may remain in check as the current stocks of staple food (wheat and rice) seem sufficient,” it added.

The SBP also noted the increase in the average headline CPI inflation from 1.7 percent in Q1-FY16 to 3.9 percent in Q1-FY17.  “This increase was expected as inflation had already dipped to ultra-lows last year; further push came from supply-side factors, which included a gradual rise in international prices of some key commodities.”