Despite growth, Pak central bank shows red flags

Pakistani economy recorded an 'encouraging growth' in the just-ended FY-17 but at the same time showed four red flags which must be taken care off.
The report, "State of Pakistan's Economy" covers up to the fiscal ended on June 30 and includes the Q3. It also shows the important indicators for FY-18 that started on July 1. The four red flags, State Bank of Pakistan (SBP) waved before the government include: The continued downturn of exports, low tax collection, the widening current account deficit and sprawling trade deficit coming on the back of rising import bill.  
But, there is good news, too. "Pakistan's growth in real GDP remained at its upward trajectory and increased to a decade high of 5.3 per cent in FY-17," the SBP said in its latest report and review of the economy. The GDP growth projection is set at 6 per cent for FY-18.
The central bank's authoritative annual analysis and appraisal of the State of Pakistan's Economy pointed out "the recent fiscal incentives led to deceleration in tax collection and appears to be counterproductive."
One of the major tax incentives and subsidy of Rs180 billion is being provided to five sectors to boost sinking exports of five sectors including textile, leather products, sports goods, hides and skins, and surgical appliances. The subsidy is disbursable over 18 months, effective from January 2017.
Pakistan was hit by the all-time high current account deficit of $32 billion due to high prices, and larger quantity of a number of imports, including the CPEC-requirement of machinery and equipment. The exports stagnated at $20.4 billion, down from $25 billion four years ago. FY-18 budget envisaged a 4.1 per cent growth of GDP. It will be supported by 14 per cent growth which comes to Rs.4 trillion in larger cash flows.
The Annual Plan for FY-18 projects exports to grow by 6.8 per cent with "on the back of projected impetus coming from removal of supply-side bottlenecks and better performance by the industrial sector."
"The import bill is likely to rise 7.6 per cent due to surge in demand for machinery and equipment. Some of this increased demand is from the under-implementation $61 billion CPEC."
However, Federation of Pakistan Chamber of Commerce & Industry (FPCCI), complained "the Rs180 billion subsidy is not being disbursed as Prime Minister Nawaz Sharif had promised, ostensibly because funds are not available with the government." This is because of low tax collection.
"Pakistan's macroeconomic indicators continue to improve, but a slowdown in exports and a drop in tax revenue will potentially undercut the pillar of recent economic growth," the bank said.  
The economy has maintained its growth momentum, said State Bank of Pakistan third quarterly report. The growth in real GDP remained at its upward trajectory, and increased to a decade-high of 5.3 per cent in FY-17, it said adding that economic indicators like private sector credit and investment also posted encouraging picture, whereas inflation remained below the target.
The report also highlighted the revival in the agriculture sector during the FY-17, which was supported by favourable policy measures, including subsidy on fertiliser, reduction in sales tax on tractors, and increased access to finance. Better agriculture had, in turn, positive spillover for trade and manufacturing sectors, argued by the report. Further, Public Sector Development Programme and CPEC-related activities also continued to boost construction related industries.
"The overall improvement in business sentiments along with supportive policies (historic low interest rate, high infrastructure spending and better law and order) has encouraged a number of firms to pursue expansion plans," the SBP report observed.
This was reflected in a significant surge in private sector credit off-take during FY-17, with a sizeable share of fixed investment loans. At the same time, an increase in machinery imports was also noted.
The report also mentions the decline in exports and remittances, which along with the increase in imports led to a higher current account deficit as compared to the last year.
On the financing side, the official external inflows in July-March FY-17 stood around the same level as last year, while both FDI and FPI inflows increased. Although SBP's foreign exchange reserves declined during this period, these are sufficient to comfortably finance more than four months of imports.
Regarding fiscal situation, the report observed an increase in the fiscal deficit to 3.9 per cent of GDP during July-March FY-17. The expenditure side of the fiscal operations remained well-managed with a contained growth in current expenditure and a robust growth of about 15 per cent in the development expenditures. However, growth in tax revenues remained less than the target.
The report also underscored the importance of sustainable levels of current and fiscal accounts in order to maintain the prevailing growth momentum, and hard-earned economic stabilisation.
 The writer is based in Islamabad. Views expressed are his own and do not reflect the newspaper's policy.
 

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