KARACHI: The State Bank of Pakistan (SBP), in its annual report, has said that the fiscal year 2013-14 remained better for the country’s macro-economy.
As per the report, the country witnessed most remarkable improvements in foreign exchange reserves, the unprecedented appreciation of the rupee in early-March, the reduction in the fiscal deficit, the lower than expected inflation rate, the improvement in private sector credit and the relatively contained current account deficit.
The SBP views the fiscal deficit at 5.5 percent of GDP was significantly lower than the FY14 target of 6.5 percent and when compared to trends in the past three years. The report said that there was a concerted effort on the part of the government to contain expenditures and generate additional revenues, but the one-off factors like the inflow into the PDF and the government delay in paying off the circular debt in FY14 also played their role. Furthermore, the SBP views the public sector enterprises (PSEs) continue to be a fiscal burden on the federal government.
“With the start of a new IMF programme, external inflows from other international financial institutions (IFIs) also began after a gap of almost three years,” the report observed. This helped stem the gradual depletion of SBP’s foreign exchange reserves.
Moreover, the $1.5 billion inflow into Pakistan Development Fund (PDF) in February/March 2014, contributed in releasing the pent up inflows, which helped in stabilizing the rupee. The positive sentiments this generated, also instilled a view that the government was finally gearing up for a growth phase.
During FY14, the worker remittances were higher by $1.9 billion than last year, exhibiting an increase of 13.8 per cent. The strong growth in remittances partially offset the impact of a rise in trade deficit and other factors on the current account balance.
According to the report, although inflation increased marginally in FY14 to 8.6 per cent, it was significantly milder than SBP’s initial projections, due to several factors.
The report observed that as part of the stabilization program to reduce the twin deficits (fiscal and external), the easing monetary policy stance that started in mid-2011, was changed in September 2013. After two consecutive 50 bps increases, SBP held its benchmark rate for the remaining part of FY14. Although the market’s inflation outlook had eased significantly by early 2014, SBP opted to pursue a cautious monetary policy driven by concerns about the external sector, and possible pressure on the PKR.
The key message in the external sector, as reported by the SBP, is that while the overall size of the external gap was manageable in FY14, financing it was quite challenging. At the start of the fiscal year, SBP’s foreign exchange reserves were consistently falling, not just because of the monthly current account deficits in the first quarter, but also because of significant IMF repayments that persisted till November 2013.
