Pak set to miss 4% GDP growth on weak industries, agriculture performance

Cash-strapped Pakistan is unlikely to meet the targeted 4 per cent GDP growth this fiscal as two major sectors agriculture and industries have failed to perform well, the central bank has forecast.

The State Bank of Pakistan (SBP) in its first quarterly report on the state of the country's economy for FY20 also advised the government of Prime Minister Imran Khan to address the "structural vulnerabilities" to put the economy on a sustainable growth trajectory.

In the case of Gross Domestic Product, the report noted that the revised estimates for the kharif season suggest that the production of important crops is likely to fall short of target for FY20.

The large-scale manufacturing sector in the country witnessed a decline of 5.9 per cent in Q1-FY20 on YoY basis. This contraction was broad-based, as construction-allied industries, petroleum and automobile industries continued on downward path.

In contrast, previous corrections in the exchange rate helped the export-oriented industries, as reflected in the relatively better performance of textiles and leather.

"On balance, however, achieving the real GDP growth target of 4 per cent appears unlikely," the SBP report released on Monday said.

Earlier, the central bank projected Pakistan's GDP growth in the range of 3 to 4 per cent, most likely 3.5%, in FY20. Such projection is, however, missing in the latest quarterly report, thus, strengthening doubts about economic slowdown to 2.4 per cent in the year, The Express Tribune reported.

"GDP growth is targeted at 4% with agriculture (growth at) 3.5%, industry 2.2% and services 4.8% The current account deficit will be hovering around 3% of GDP," it quoted the Planning Commission as saying in its Annual Plan 2019-20.

Pakistan recorded a nine-year low GDP growth of 3.3% in the previous fiscal year ended June 30, 2019, it said.

The central bank report further highlighted that the average headline CPI inflation reached 11.5 per cent in Q1-FY20, extending the steep upward trend persistent since the beginning of FY19.

"Not only this level was double the inflation observed in the same quarter last year, it was also the highest level of quarterly inflation since Q4- FY12," it said.

This outcome was attributed to the lagged pass-through of the exchange rate depreciation towards the end of FY19; rationalisation of energy tariffs; and revenue-led fiscal measures taken in the budget 2019-20, it said.

However, on the external front, the balance of payments continued to improve during Q1-FY20.

Beside significant improvement in trade deficit, and with the receipt of the first Extended Fund Facility (EFF) tranche from the International Monetary Fund and increase in foreign portfolio investment, the current account gap was plugged by the available financial flows.

These inflows also helped the SBP to increase its foreign exchange reserves by $656.2 million and reduce its net forward liabilities by $1.3 billion during the quarter, the report said.

Going forward, the central bank emphasized that it is vital that the government continues to address the underlying structural vulnerabilities and put the economy on a balanced and sustainable growth trajectory.

According to the report, Pakistan's economy moved progressively along the adjustment path during the first quarter of FY20. The macroeconomic stabilisation process picked up momentum with the initiation of the IMF's EFF programme, it said.

The SBP continued to keep the monetary policy consistent with the medium-term inflation target; whereas, consolidation efforts were visible on the fiscal front. Further, a market-based exchange rate system was implemented, to which the interbank foreign exchange market adjusted relatively well.

According to the report, the payoff from ongoing stabilisation efforts has become visible in the form of declining twin deficits. The current account deficit in Q1-FY20 fell to less than half of last year's level, primarily on the back of significant import compression, it said.

Owing to low unit prices, Pakistan's exports growth remained low. However, in volumetric terms exports witnessed noticeable growth. On the fiscal front, the overall deficit remained lower as compared to the same period last year, and the primary balance recorded a surplus for the first time in seven quarters, the report added.

Pakistan is facing a serious economic crisis with short supplies of foreign currency reserves and stagnating growth in recent years.

In IMF approved the 39-month bailout package for Pakistan in July last year under which the country would receive about USD 6 billion from the global lender.

Pakistan has also signed an agreement with the Asian Development Bank for a loan worth $1.3 billion to support the cash-strapped country's public finances and shore up its slowing economy.

The Pakistan government has also borrowed $10.40 billion from friendly countries like China, Saudi Arabia and the UAE to stabilise the country's foreign exchange reserves and repayment of old loans.