4pc growth target to be missed: SBP


KARACHI: Pakistan’s economy is unlikely to meet the GDP growth target of four percent whereas inflation is expected to remain within the 11-12pc range, said the State Bank of Pakistan (SBP) in its first quarterly report of FY20 issued on Monday.

Meanwhile, the bank estimates the current account deficit to remain low at 1.5-2.5pc in the ongoing fiscal year.

The SBP said the agriculture output would be lower than the target while the industrial sector’s performance would be subdued; only the services sector would be close to the previous fiscal year.

The performance of commodity-producing sectors is also likely to remain restrained. In the case of agriculture, targets for the overall crop sector may not be achieved, said the report.

The industrial sector is also expected to remain under stress. The latest large scale manufacturing index (LSMI) for October 2019 shows an 8pc decline on a year-on-year basis, steeper than the 5.9pc decline recorded in 1QFY20.

The government’s decision to postpone regulatory actions for businesses for implementation of the CNIC condition up till February 2020 and axle load restriction may ease manufacturers’ operational constraints to some extent, it added. “In view of these developments, achieving the real GDP growth target of 4pc appears unlikely,” side the SBP report.

With the industrial sector under stress, its demand for imported raw material is expected to remain low as well. Commodity prices are also subdued, amid a slowdown in world economy and absence of key triggers (resolution of the US-China trade dispute and Brexit). “On balance, the current account deficit for FY20 is likely to stay within the range of 1.5 – 2.5pc of GDP,” said the SBP report.

The central bank estimates average headline CPI inflation to stay within the range of 11 – 12pc. “This forecast is subject to upside risks in the form of a reversal in global crude prices, exchange rate depreciation and increased budgetary borrowings.”

This high inflation outcome was driven largely by the pass-through of the exchange rate depreciation, correction in energy prices, shortage of food items, and revenue measures taken by the government said the SBP.

“For businesses, perceptions about the current economic conditions remained below the threshold level.” In addition to the government’s revenue measures and tight credit conditions, this may also reflect the impact of the Federal Board of Revenue’s instructions to businesses to record CNIC numbers of buyers and suppliers while filing sales tax returns, said the SBP report.

The large businesses refrained from taking a long-term view. This cautious behavior, coupled with tapering demand and the compression of unregistered businesses reinforced the economic slowdown.

From the policy perspective, it is important to continue with the adjustment process despite weakening economic activity, as well as the visible stability gains in terms of falling twin deficits, said the report.

It said the policy continuation is warranted given the lingering vulnerabilities in the economy and the chronic nature of structural weaknesses. The bank also stressed for implementation of announced documentation-related measures suggesting food price management.

In the agriculture sector, revised estimates for the Kharif season suggest that the production of important crops is likely to fall short of targets. With the increase in financial and operational costs, a number of industries, including steel, automobiles, chemicals, and cement, cut their production. Furthermore, the government’s policy to shift away from furnace oil for power generation forced local refineries to scale back their operations.

In the services sector, trends in proxy indicators – like the decline in LSMI and imports, and lower sectoral credit off-take compared to 1QFY19 – suggest that wholesale and retail trade activities were relatively subdued.

“The headline CPI inflation recorded a broad-based increase of 11.5pc during the quarter – the highest quarterly inflation since 4QFY12,” said the report.

Energy prices posted the steepest rise of 32.5pc during the quarter, with an upward revision in gas prices alone contributing 1.6 percentage points to the headline inflation. Food inflation rose to 11.8pc during 1QFY20, said the report.


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