KARACHI: The country’s overall macroeconomic conditions remained challenging during the first quarter of the current fiscal year, the central bank said in its report on the State of Pakistan’s Economy for FY19 on Tuesday.
The primary concern was the steep rise in global crude prices, which not only reinforced the already strong underlying inflationary pressures in the economy, but also eclipsed emerging improvements in the external sector.
Fiscal pressures also remained intact, as expenditure rigidities allowed only a limited room for the government to maneuver, the report said. Responding to these challenges, the new political regime immediately announced reduction in development spending, partially reversed tax relief measures, and also explored avenues to bridge the external financing gap.
According to the report, the 6.2 percent target for real GDP growth seems unachievable with the policy focus now tilted towards macroeconomic stabilisation.
The production of all major kharif crops remained lower as compared to the last season, due to lower water availability, which led to a decline in the total area under production.
Further, crop yields suffered due to subdued fertiliser off-take amid rising prices of both urea and DAP, it said, adding that the large-scale manufacturing also contracted 1.7 percent during the first quarter of FY19, after recording a healthy growth of 9.9 percent during the same period of FY18.
The output of construction-allied and consumer durable segments, which were the major drivers of growth last year, decelerated on a year-on-year basis.
The report highlighted that with the underlying inflationary pressures remaining strong and the twin deficits staying at elevated levels, the monetary policy continued to move along the adjustment path.
During the two Monetary Policy Committee (MPC) meetings that were held during the quarter, the policy rate was raised by a cumulative 200 basis points.
Besides, the persistence of strong demand pressures, the second-round impact of higher fuel prices and exchange rate depreciation pushed up core inflation.
As for the private credit, a strong expansion was observed during the period under review, compared with the net retirements witnessed in the same quarter last year.
The activity in working capital loans was more prominent, since rising commodity prices and input costs increased the financing requirements of businesses, it said.
The report also observed that the consolidated revenues grew 7.5 percent during the quarter; however, this pace was lower than the 18.9 percent uptick witnessed during the first quarter of FY18.
Expenditures grew 11 percent during the quarter, compared with 13.5 percent in the corresponding period last year. The resultant higher fiscal deficit was financed through increased government borrowing from both domestic and external sources.
On the external front, the report said the continued exports growth and a steady increase in workers’ remittances partially helped contain the current account deficit.
However, the level of this deficit remained a concern, as rising oil prices resulted in the quarterly import bill crossing $4 billion mark. With foreign investments declining on a year-on-year basis and external borrowing by the private sector remaining subdued, the financial inflows proved insufficient.
Resultantly, pressure on the balance of payments continued to mount, with the country’s foreign exchange reserves declining $1.4 billion and the rupee depreciation by 2.2 percent during the quarter.
Nonetheless, financing of the current account might improve, as there is an expectation of receiving higher foreign inflows from both private and official sources during the second half of FY19, the report said.
Not only would this bolster the country’s forex reserves, but also ease pressures in the domestic foreign exchange market.
However, in order to revert to a stable macroeconomic environment over the medium-term, the report underlines the importance of the continuation of the right mix of polices.
It lays particular emphasis on initiating the needed structural reforms to push the country’s productivity frontier and take the growth momentum forward.