KARACHI: The State Bank of Pakistan has released its First Quarterly Report for fiscal year 2013-14 on the State of Economy.
The report says that as the industrial sector revived, import pressures reappeared, especially for capital goods and raw materials. The import of petroleum, machinery, and metal, was particularly strong, which increased the trade deficit by $ 0.6 billion during the first quarter of Fiscal Year (FY) 2013-14 over the first quarter of FY 2012-13. Additional stress on the current account came from delayed inflows of coalition support fund (CSF) during the period. As a result, the current account posted a deficit of $ 1.2 billion, against a surplus of $ 0.4 billion in the first quarter of previous fiscal year. Although worker remittances posted an impressive 9.1 per cent growth, this was not enough to cover the foreign exchange gap in other heads.
The report says that since macroeconomic indicators were favourable at the start of the year, the increase in real gross domestic product (GDP) growth in FY 2013-14 was discernible. Estimates for growth exceeded expectations: GDP grew by 5.0 per cent during the first quarter of FY 2013-14, compared to only 2.9 per cent in first quarter of FY 2012-13, and a target of 4.4 per cent for the full year. Industry and services were the major drivers of growth, as agriculture performed below target.
The report said that repayments on external debt continued to exceed fresh disbursements while foreign investments remained shy. This caused a strain on the country’s foreign exchange reserves, which posted a decline of $ 1.2 billion during the period. As a result, the Pakistani Rupee depreciated by 6.0 percent against the US Dollar during the period, compared to only 0.3 per cent in the first quarter of the previous fiscal year.
The report pointed out that headline CPI inflation increased to 8.1 per cent in the period compared to only 5.6 per cent in the preceding quarter. SBP increased its policy rate by 50 bps to 9.5 per cent in the monetary policy decision announced in September 2013 to rein in the second-round effect of food inflation, curb inflation expectations and to counter market sentiments following the volatile rupee.
According to the report, government borrowing from the central bank was more pronounced, as commercial banks did not participate actively in T-bill auctions held during the quarter. As a result, the government could not meet the limit of zero quarterly borrowing from SBP, though its borrowings were well below the limit agreed with the IMF.
The fiscal deficit fell to 1.1 per cent of GDP in the first quarter of the current fiscal year, from 1.2 per cent in the corresponding quarter of last fiscal year. This improvement occurred on both the revenue and expenditure sides. On the revenue side, it was the increase in tax rates and not the base which is responsible for higher collection during the quarter. Non-tax collections were also high due to certain one-off revenues. On the expenditure side, a major positive was the reduction in interest payments, following the interest rate cuts in the previous fiscal year.
The report said that public debt posted a record increase of Rs 1.0 trillion during the quarter. This increase, however, does not represent the fiscal imbalances alone, which recorded only a modest increase. Instead, this increase can primarily be traced to large revaluation losses associated with the two external debt stocks due to adverse exchange rate movements during the period. According to the report, there is a corresponding need to rebalance the maturity profile of Pakistan’s domestic debt. The growing prominence of 3-month instruments in the outstanding volume of T-bills requires attention because this exposes the financial system to interest rate and roll-over risks.
The report suggests that in order to maintain the current growth momentum, and to take the economy to a higher growth trajectory, the government should speed up structural reforms in the fiscal and energy sectors. By focusing on these sectors, the government has signalled that its priorities are correct. It urges the government to sustainably manage long-standing issues, which has kept growth below potential.
