KARACHI: The State Bank of Pakistan (SBP) on Thursday projected the GDP growth at five to six percent for the current fiscal year of 2016/17, betting on an expected revival of agriculture and industrial sectors.

“The major contributions to this increase are expected to come from a recovery in agriculture sector and further increase in industrial activity, (while) the services sector is to maintain the growth of the previous year,” the SBP said, in its annual report on the state of economy,

“Without private sector participation, it will be hard to achieve a higher and sustainable growth that is built on the pillars of entrepreneurship, innovation and competitiveness.”

The central bank’s projection is in line with the government’s target of 5.7 percent. The country’s economy grew at 4.7 percent during the past fiscal year of 2015/16.  The bank said an all-important support coming from a stable macroeconomic environment and growing investments in China-Pakistan Economic Corridor-related projects will ease infrastructure and energy constrains and underpin a modest economic growth.

“The economic activity would benefit from pro-growth policies,” it said. The policy rate currently stands at a historic low of 5.75 percent, which has made funding easier for businesses and consumers.  Similarly, growing development spending, despite a planned reduction in budget deficit, would continue to support infrastructure-related industries.

The bank sees an uptick in inflation numbers in the FY17 on growing demand, tax effects, oil surge and supply disruptions-led food price hike. It said the consumer price inflation is expected at 4.5 to 5.5 percent, lower than the government’s target of six percent.

“Some increase from the previous year’s level is on cards because domestic demand is gradually picking up and impact of taxation measures announced in the FY17 federal budget may be passed on to consumers,” it said. “Therefore, the energy group is unlikely to record deflation this year.”

The State Bank projected budget deficit in the range of four to five percent in FY17, slightly over than the government’s target of 3.8 percent. Last year, the deficit was 4.6 percent. “To achieve, this target, the government would require strong fiscal discipline and concentrated efforts to enhance revenues,” it said. “The continuation of taxation reforms for widening the tax base and bringing more people in the tax net would be key to achieving the target.”

The bank said impact of UK exit from European Union on international commodity prices, slowdown in the Chinese economy and an unexpected change in the pace of work on CPEC projects pose challenge to current account deficit. It is likely to stay in the range of 0.5 to 1.5 percent of GDP.

The bank said exports might remain low at $20-23 billion – lower than $24.7 billion target for the current year. It, however, said exports could post marginal recovery supported by further improvement in energy supplies, some pick-up in global commodity prices and recovery in global demand. “Measures taken by government to support exporters like release of tax refunds and zero rating of exporting sectors will also contribute to this recovery.”

The central bank said Chinese economy has created an opportunity for textile sector of Pakistan after moving away from low value-added textiles making due to rising labour cost. “Pakistan’s textile sector could step into fill the gap and get integrated in the global value chain.”

But, the ongoing power and construction projects under CPEC are likely to increase import bills. “A moderate increase in domestic demand and the expected recovery in global commodity prices would also contribute towards imports growth during FY17.” Imports are projected at $42 to $43 billion for FY17.

Likewise, remittance inflows are expected to remain tepid between $20.5 and 21.5 billion, it said.  The bank advised the government to remove structural weaknesses, “to pace towards a high growth trajectory.”

The current level of private investments and savings in the country needs acceleration to keep pace with required investible resources. Secondly, structural issues in the export industry need to be resolved. Thirdly, the reliance of the tax system on stop-gap measures is creating distortions in the economy. Finally, the country needs to spend more on social sector development to address social issues.

Last year, higher infrastructure spending by the government and decades low interest rates provided a boost to domestic demand, while improvements in energy supply and the security situation also supported this momentum.

“Though some macroeconomic indicators were short of targets in FY16, they still posted better performance over the last year.” The bank asked the government to continue with its reforms in the taxation system and energy and loss-making public sector firms after the completion of the International Monetary Fund’s (IMF) programme. “The IMF programme has been a key element of balance of payments comfort over the past three years,” it added. “The programme has helped the country’s stabilisation programme, and shored up the confidence of international creditors.”

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