KARACHI: Although persistent structural weaknesses continue to take a toll on the country’s overall economic performance, the GDP growth is likely to remain higher than last year’s level, said the State Bank’s second quarterly report issued on Friday.
The report said the energy shortages continue to be a serious issue, which held back growth in a number of industries.
Similarly, Pakistan has not been able to attract sufficient foreign direct investment, even when our peer countries are experiencing rising FDI inflows, said the report.
Moreover, tax revenue growth remains sluggish despite several measures introduced during the year and the losses in public sector enterprises (PSEs) remained a burden on scarce fiscal resources, as restructuring and privatisation programme of PSEs could not gain momentum as expected, said the SBP report.
In this context, the windfall gain from the collapse in international oil prices, low inflation, and improvement in balance of payments provide an opportunity to expedite difficult structural reforms in the energy sector, PSEs, revenue generation, and overall governance to put the economy on a higher growth trajectory, said the report.
“The GDP growth is likely to remain higher than last year’s level. A better wheat crop, on the back of favourable weather conditions and increase in support prices, may compensate for the sluggish performance of kharif crops,” said the report.
According to the report, fiscal data indicates that the government was able to contain its deficit mainly due to low growth in expenditure during the first half of 2015.
Also, the financing mix improved as increased external funding reduced the burden on the banking system, particularly on the central bank.
“Consequently, for the first time in the current IMF programme, the country met all the quantitative (performance) targets for end-December 2014,” it added.
Large scale manufacturing (LSM) showed modest growth of 2.3 per cent during first half of fiscal year 2015, less than half the growth achieved during the same period last year (LSM growth was 6.6pc in the first half of 2014).
While the persistent energy shortages (especially of gas) constrained activity in textiles, paper, leather and glass, the delay in cane crushing took its toll on sugar production in the first half of the year.
More specifically, commercial banks’ investment in government securities increased by Rs667.6 billion during H1-FY15 to Rs4,735bn.
“The government also accepted huge sums in these auctions to lengthen the maturity profile of its debt, and to substitute some of its borrowings from SBP,” said the report, adding that this enabled the government to contain its borrowing from SBP within the ceiling agreed with the IMF for end December 2014 and meet the limit of zero quarterly net borrowing from the central bank.
The benefit of reduced international oil prices was passed on to consumers in Pakistan, to a larger extent compared with peer economies, said the SBP report.
This, along with a stable exchange rate and softened inflationary expectations, led to a steep fall in CPI inflation from 8.9pc in H1-FY14 to only 6.1pc during H1-FY15.
“As these factors are expected to prevail also in the remaining part of the year, the current low inflationary trend is likely to continue.”
In terms of the country’s fiscal performance, the budget deficit as per cent of GDP was slightly higher than the last year’s level. The government (federal and provincial combined) was able to contain expenditures growth to only 4.8pc in H1-FY15, compared with 10.7pc in H1-FY14, mainly due to a fall in interest payments.
In H1-FY15, fiscal deficit was 2.2pc of the GDP compared to 2.1pc in H1-FY14.
Although the government introduced several tax measures in the budget for FY15, FBR revenues increased by only 13.6pc during H1-FY15, compared with 16pc in the same period last year, said the report.
“More worryingly, to achieve its revised target of Rs2691bn by fiscal year-end, FBR has to realise revenue growth of 24.2pc in the second half of FY15 – undoubtedly a challenging task,” said the report.
The report said the construction is set to improve as more PSDP funds are released by the federal and provincial governments.
While challenges faced by LSM may continue, the services sector is likely to maintain last year’s growth momentum,” said the report.