The State Bank of Pakistan (SBP) issued a cautionary statement on Monday, stating that achieving the targeted 4 percent GDP growth for the current fiscal year is unlikely.
The central bank’s remarks were made in its report on the State of Economy for the First Quarter (July – September) of the fiscal year 2019/2020.
The report indicated that the current account balance is expected to see improvement compared to the projections presented in the Annual Report for 2018-19. This improvement is primarily attributed to a more substantial-than-expected contraction in imports. The industrial sector, facing stress, is anticipated to maintain low demand for imported raw materials. Additionally, subdued commodity prices globally, coupled with the unresolved US-China trade dispute and Brexit, contribute to the decline in imports.
On the downside, the tepid global growth outlook and subdued commodity prices may exert pressure on both exports and remittances. Nevertheless, any negative impact on these earnings is expected to be offset by the reduction in import payments. Consequently, the SBP anticipates the current account deficit for FY20 to remain within the range of 1.5 – 2.5 percent of GDP.
Despite this overall stability, the report highlights that the performance of commodity-producing sectors is likely to remain subdued. In agriculture, the targets for the overall crop sector may not be met, as the production of both cotton and sugarcane is estimated to be lower than in FY19. Similarly, the industrial sector is expected to face ongoing challenges, with Large Scale Manufacturing (LSM) estimates for October 2019 showing an 8.0 percent year-on-year decline, steeper than the 5.9 percent decline recorded in Q1-FY20.
However, the export-oriented industries continue to outperform others. The government’s decision to delay regulatory actions for businesses, such as the implementation of the CNIC restriction, until February 2020, may offer some relief to manufacturers by easing operational constraints.
The report concludes, “In view of these developments, achieving the real GDP growth target of 4 percent appears unlikely.”
In terms of inflation, the SBP expects pressure to recede in the second half of the fiscal year due to continued softness in domestic demand, which is expected to keep core inflation in check. Stability in the exchange rate, supported by improvements in the Current Account Deficit (CAD) and financial inflows, is also anticipated. For the full year, the SBP estimates the average headline Consumer Price Index (CPI) inflation to remain within the range of 11 – 12 percent. However, this forecast is subject to upside risks, including a potential reversal in global crude prices, exchange rate depreciation, and increased budgetary borrowings. The SBP will closely monitor these factors as the fiscal year progresses.
