SBP sticks to growth forecast of 5-6pc in FY17

KARACHI: The State Bank of Pakistan (SBP) on Friday kept its economic growth forecast for the current fiscal year unchanged at five to six percent, predicting a robust recovery in agriculture sector.

Higher spending in infrastructure projects also improved hopes of achieving targeted growth during the current fiscal year of 2016/17, the State Bank of Pakistan said in its second quarterly (October-December) report on the State of Pakistan’s Economy.

The gross domestic product growth was recorded at 4.7 percent in 2015/16 but the country wants to raise the growth to seven percent or more to alleviate poverty, boost tax revenue and attract investment.

“The growth in agricultural sector is expected to rebound on account of higher production of cotton, sugarcane, and maize and increased prospects for wheat harvest close to last year after rains in early February 2017,” SBP said.

The central bank said the completion of early harvest energy projects under the China-Pakistan Economic Corridor is expected to provide an additional boost to industrial growth.

“These expectations are in line with continuing robust trends in private sector credit and import of machinery and raw materials,” it added. “The growth in industry, though likely to fall short of its target, is expected to maintain the last year’s level.”

The bank said the textile industry, the largest sub-component of the large scale manufacturing sector, is expected to post some recovery in the second half of 2016/17 on the back of Rs180 billion exports package, while the annual growth in construction sector is likely to remain robust on the uptrend in cement and steel outputs.

LSM posted recovery in the second quarter of FY17 with increase in production of food, cement, steel, pharmaceuticals, automobiles and electronic industries. It further said the increase in liquefied natural gas import and start of new power plants are likely to keep the energy production at the last year’s level. 

The central bank forecast the full-year inflation in the range of four to five percent. “Increase in agriculture production and sufficient food supplies, stable exchange rate, and a limited pass-through of rising international commodity prices to domestic prices are expected to keep inflation low and stable,” it said.

“Importantly, in case of oil prices, less-than-warranted increase in domestic motor fuel prices would limit its direct and second round impact on CPI (consumer price index) inflation.” It said recent increase in investment demand, as reflected by the widening of twin deficits, may not have an adverse impact on inflation in the remaining months of FY17.

The SBP said the services sector, accounting more than half of the economy, is expected to achieve its annual target.

 current trends in trade, especially imports, higher production and sale of commercial vehicles, substantial increase in bank credit, flourishing housing schemes and rising internet subscription – all suggest a vibrant services sector.”

It, however, said current account deficit may widen on strong growth in imports. “Current account deficit has almost doubled compared to the last year… due to a surge in growth-inducing imports along with non-realisation of coalition support fund and decline in exports and remittances.”

Yet, the bank added that foreign direct investment and proceeds from sukuk issuance are little more than sufficient to finance higher current account deficit.

There is a need, “to contain current account deficit to the manageable level to sustain the external sector stability.”

The central bank projected foreign exchange reserves at the comfortable level till the year-end.

The bank said declining number of migrant workers, the pound sterling’s depreciation against the US dollar and stricter regulatory controls in the US may keep remittance inflows close to the last year’s level. It said muted remittance growth may corrode the export gains.

“The recent decision of Kuwait government to lift restrictions on issuing visas to Pakistani nationals bodes well for increased remittance flows going forward,” it added.

On fiscal deficit, the SBP said it would be higher than the annual target of 3.8 percent, “keeping in view that the deficit is usually higher in the second half.”

Fiscal deficit remained 2.4 percent of GDP in the first half.

The SBP added that expenditures are likely to remain elevated due to the government’s commitment to complete most of the power and infrastructure projects by the close of 2017/18 and fund ongoing military operations.

It, however, assumed no significant change in the current pace of revenue collection in the absence of additional revenue generating measures in its economic report.