Country in danger of missing FY2018 growth target of 6pc; agriculture lags: SBP

KARACHI: The country is in danger of missing its 6 percent growth target in 2018 due to the poor performance of the agriculture sector that expected to grow at a more tepid pace than projected amid bad cotton crop and less wheat cultivation this season, the central bank said on Friday.

“… agriculture growth is likely to remain lower than last year, as well as the target set for FY18,” the State Bank of Pakistan said in its quarterly report on the state of the country’s economy.

“This assessment is primarily based on an expected shortfall of 2.5 million bales in cotton production, as well as below-target area under wheat cultivation. In this context GDP growth is likely to remain slightly below the target of 6 percent.”

The bank said the growth outlook is strong but “risks to overall macroeconomic stability have increased due to widening imbalances in country’s balance of payments”. The real sector of the economy was performing well, the external account presented challenges.

“Pakistan’s has economy reached a familiar juncture where balance of payments challenges warrant concrete and timely measures to preserve the macroeconomic stability and growth momentum,” the bank said. “If the external challenges are addressed, other fundamentals are strong enough to put it on a sustainable high growth path.”

The central bank was a bit more optimistic on its 2017/18 exports forecast, saying a strong demand in international markets, currency depreciation and state incentives would result in $24.1 billion to $24.6 billion export revenue in the current fiscal year, up from the projected $23 billion to $24 billion two months back. The government has fixed $23.1 billion exports target for FY18.

“Following a healthy 16.4 percent growth in the month of February 2018, the cumulative export growth in July-Feb FY18 has reached 11.7 percent. If exports continue to grow at the same pace for the remaining months, the target of $23.1 billion can comfortably be surpassed.” The central bank also sees a favourable outlook for the country’s energy bill supported by stability in international commodity prices. It has been stated on the prospect of stable global oil prices on the back of rapid increase in US shale production, which is likely to outweigh the anticipated pickup in global oil demand.

“If these expectations materialise, then at least the price component of Pakistan’s energy bill may be less of a concern going forward,” the report said.

However, the SBP warned that higher domestic fuel prices could drive up inflation in the coming months.

Since end-December 2017, the government has increased domestic petrol prices by Rs11/litre to pass on the impact of the high import cost as well as the rupee depreciation.

“Though underlying inflation has stabilised, and the headline inflation is low (and falling, as suggested by 4-month low inflation recorded in February 2018), upward pressures coming from fuel costs are hard to ignore,” the bank said.

The SBP’s assessment on fiscal accounts is largely unchanged. It fears the budget deficit target is at risk in the current fiscal year because the government might fail to rein in spending fast enough.

The overall fiscal deficit is likely to exceed the 4.1 percent of gross domestic product target for FY18, despite an improvement in revenue growth. This is primarily due to the continued momentum in development spending as well as an increase in the debt servicing cost, the SBP report highlighted.

“The overall current expenditures are also likely to remain high because of expected election-related spending,” the central bank warned.

It welcomed the eight-month-long consecutive export growth and a rebound in workers’ remittances, but said “they were overshadowed by rising imports”. Resultantly, the current account deficit increased to $7.4 billion in the first half of FY18, from $4.7 billion last year.

Even though financial inflows were higher this year, they were insufficient to offset the rise in the current account deficit. Consequently, SBP’s liquid reserves came under pressure. The SBP pointed out that increased consumer spending has led to a strong growth in durables such as automobile and electronics, while the ongoing infrastructure and construction activities have stimulated the allied sectors of cement and steel.

It highlighted that the growth in revenue collection outpaced the increase in expenditures in July-December FY18, which led to a broad-based improvement in fiscal indicators. "The overall fiscal deficit was contained at 2.2 percent of GDP, down from last year’s 2.5 percent," the SBP quarterly report added.