KARACHI: The State Bank of Pakistan (SBP) highlighted the critical need for immediate structural reforms in the country’s economy in its report on the State of Pakistan’s Economy for the first quarter of Fiscal Year 2018/2019, released on Tuesday.
Emphasizing the urgency, the central bank stated that setting the direction and pace of reforms is essential not only to address recurring macroeconomic imbalances but also to enhance the productivity frontier of the economy.
The report outlined the challenging macroeconomic environment during the first quarter of FY19. The sharp increase in global crude prices was a primary concern, reinforcing existing inflationary pressures and overshadowing improvements in the external sector. Additionally, uncertainties surrounding balance of payments support amid a political transition and fiscal pressures due to limited government maneuvering room added to the complexities.
Responding to these challenges, the new political regime implemented measures such as cuts in development spending, partial reversals of tax relief, and exploration of avenues to bridge the external financing gap. Despite these efforts, large-scale manufacturing (LSM) experienced contraction for the first time in over seven years during Q1-FY19. Exchange rate depreciation and stabilization measures were identified as contributors to this contraction.
The agriculture sector also faced challenges, with lower-than-average rainfall exacerbating water shortages, leading to decreased crop cultivation and harvests. In response to economic slowdown, the SBP intensified stabilization efforts, tightening monetary policy further by increasing the policy rate in both policy decisions held during the quarter.
While the SBP acknowledged the moderation in domestic demand during Q1-FY19, it noted that major indicators still reflected vibrancy compared to recent averages. The report emphasized the importance of addressing policy uncertainties and outlining a clear path for economic reforms to revert to a stable macroeconomic environment.
The SBP underscored the significance of securing frontloaded balance of payments (BoP) support to alleviate pressure on foreign exchange (FX) reserves and the Pakistani rupee. The report highlighted that the confidence of consumers and businesses had tapered off due to rising cost pressures and an uncertain outlook.
The government’s initiation of reforms in the fiscal sector was acknowledged positively in the report. Notable reforms included shifting policymaking power from the Federal Board of Revenue (FBR) to an independent authority, focusing the FBR solely on tax administration and collection. Efforts to access third-party data for information on potential high net-worth individuals and reforms in the real estate sector were also recognized.
In conclusion, the SBP urged the government to deepen and accelerate the pace of reforms within the fiscal and energy sectors, and across other segments of the economy. The objective is to rationalize the incentive structure, enhance ease of doing business, and improve public financial management and governance. The report emphasized that putting the right policies in place is critical to breaking the cycle of boom and bust and fostering sustainable growth and productivity.
