Pakistan's macroeconomic environment improves
A shopkeeper arranges boxes of mobile phones at a store in the Saddar Mobile Market in Karachi, Pakistan, on Friday, May 29, 2015.
Islamabad - The financing of budget deficit indicates that the government did not resort to inflationary borrowing from SBP; instead, it retired a huge sum of Rs674.4 billion (on cash basis) during Jul-Mar FY15.
The third quarter of FY15 ended with a visible improvement in the Pakistan's macroeconomic environment, according to SBP report on the state of economy. External sector improved considerably, (a) the current account, benefiting from a robust growth in workers' remittances, higher inflows under Coalition Support Fund, and a sharp reduction in oil prices, posted a notable surplus in Q3-FY15; and (b) the SBP's liquid forex reserves more than doubled the level seen a year ago, enough to finance three months of the country's import bill.
The resulting stability in the exchange rate, together with the government decision to pass-on the benefit of fall in international oil prices to domestic consumers and the prudent monetary management, not only pushed YoY CPI inflation down to a decade's low, but also eased inflation expectations as shown by IBA-SBP's Consumer Confidence Survey. The reduction in inflation is broad-based: all measures of core inflation (non-food-non-energy, trimmed, and Relatively Stable Component of CPI) posted noticeable declines during the period of analysis.
The report added that the budget deficit during Jul-Mar FY15 slightly narrowed to 3.8 per cent of GDP, compared with 3.9 per cent in the same period last year. FBR tax collections grew by 12.7 per cent during Jul-Mar FY15, which were well below the 17.9 per cent growth recorded in Jul-Mar FY14. Unlike the revenue side, the government efforts to control spending supported fiscal consolidation. Overall expenditures grew by 8.3 per cent during Jul-Mar FY15, against 8.7 per cent in the same period FY14. It is also encouraging to note that lower growth in expenditures was not at the expense of development spending, which grew by over 20 per cent YoY during the review period.
The financing of budget deficit indicates that the government did not resort to inflationary borrowing from SBP; instead, it retired a huge sum of Rs674.4 billion (on cash basis) during Jul-Mar FY15. As a result, the government was not only able to contain its borrowing from SBP within the IMF ceiling for end-Mar 2015, but also met the limit of zero quarterly borrowing prescribed in the SBP Act, 1956.
With these improvements, the policy focus is gradually moving from stabilisation to economic growth. SBP has already initiated monetary easing to support economic activity by cutting its policy rate to a historic low. This policy reversal is likely to support credit to the private sector, which grew by only 5.5 per cent during Jul-Mar FY15, compared with 10 per cent during the same period last year. Investment, which has been a key concern for economic growth in recent years, is likely to benefit from monetary easing and planned investment under the China-Pakistan Economic Corridor.
The report also noted that the real GDP grew by 4.24 per cent in FY15. Though it was the highest since FY08, it fell short of 5.1 per cent target for the year, as most of the challenges to economic activity continued to persist.