Widening twin deficits overshadow performance of real economy: SBP


Masroor Afzal Pasha


Real Gross Domestic Product (GDP) maintained its upward trajectory, exhibiting a 13-year high growth of 5.8 percent in FY18. Benign inflationary environment and improved law and order situation boosted business sentiments, resulting in higher credit off-take especially for fixed investment. However, this improved economic growth came amid widening twin deficits, which pose challenges for the sustainability of the growth momentum,
According to State Bank of Pakistan’s Third Quarterly Report on the State of Pakistan’s Economy released here on Wednesday. The report pointed out that improvement in the crops sub-sector, especially cotton and sugarcane, paved the way for agriculture to surpass last year’s performance. Noteworthy contributions from construction- allied industries owing to CPEC and PSDP resulted in a 10-year high growth of the industrial sector.
The report says that in particular, better performance of large-scale manufacturing activity was supported by robust domestic demand, improved business environment and capacity expansions in some of the industries. Strong activity in the commodity-producing sectors also led to the services sector maintaining its growth momentum.
The report cited that a sufficient supply of key food items, such as wheat, sugar and rice, resulted in subdued food inflation, which helped to partially offset the higher non-food inflation. The report also observed that the effects of Pak Rupee depreciation on inflation came into play during Q3-FY18. As inflationary expectations shored up, SBP increased the policy rate in January 2018.
On the external front, the report noted that despite a recovery in exports and remittances, a rebound in global oil prices, and higher transport and machinery imports led to a current account deficit of US$ 12.1 billion – the highest seen during July-March of a fiscal year. Even though financial inflows were higher in Jul-Mar FY18 than last year, they were still insufficient to finance the current account deficit. Resultantly, SBP reserves dropped to $11.6 billion by end-March, and the Rupee depreciated by 9.6 percent cumulatively during July-March FY18.
On the fiscal side, the report highlighted the increase in the fiscal deficit to 4.3 percent of GDP during Jul-Mar FY18, surpassing the full-year target of 4.1 percent. The sharp increase in both current and development expenditure, largely emanating from a jump in provincial spending, amid slower growth in Q3-FY18, drove the higher deficit.

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