KARACHI: The State Bank of Pakistan (SBP) said on Thursday the cost of doing business has to be brought down to make Pakistan’s growth more sustainable.

In its second quarterly report for 2015-16, the SBP said export-friendly industrial policies should be laid out and energy supplies must be smoothened further.

According to the report, improvements in some of the macroeconomic indicators are reflected in subdued CPI inflation, adequate foreign exchange buffers, stable exchange rate, low current account deficit despite a sharp decline in exports, and an improved fiscal position. “This stability was the key reason behind the SBP’s decision to cut the policy rate in September 2015 to a historically low level,” it said.

The report says the impact of oil price decline was felt directly on CPI inflation. Lower prices have benefited consumers, but they have also had an impact on farmers’ incomes and affected their cropping decisions. Cotton production has declined sharply this season, but the overall losses in the crop sector are now expected to be modest, with good prospects of wheat crop, the SBP said. “Initial estimates suggest timely rains and better input availability have reportedly improved the per-acre harvest, increasing hopes for a bumper crop for the third straight year,” it said.

The impetus to GDP growth is likely to come from vibrancy in domestic construction as well as an increase in large-scale manufacturing (LSM) growth from 2.7% in Jul-Dec 2014 to 3.9% year on year in Jul-Dec 2015. While higher development spending by the government set the momentum for domestic construction activity, the increase in LSM growth was supported by better energy management, lower commodity prices, and accommodative policies — for instance, higher Public Sector Development Programme (PSDP) spending, Apna Rozgar scheme and multi-decade low interest rates.

The report noted that higher development spending did not impede the government’s fiscal consolidation efforts, as the overall budget deficit dropped appreciably to 1.7% of GDP in the first half of 2015-16 from 2.4% of GDP in the same period of 2014-15. The SBP attributed this performance to better revenue generation as well as a decline in non-development spending. Government revenues have grown by 14.6% during the first half of 2015-16 on the back of additional tax measures that the government took during the second quarter of the fiscal year. “Not only has the government been able to reduce the fiscal gap, but the availability of external funding also enabled it to shift its financing away from domestic resources,” it said.

The report stated that official foreign exchange inflows helped finance the current account deficit during the period and compensated for insufficient private investment inflows. The overall current account deficit reached $ 1.4 billion during Jul-Dec 2015, significantly lower than $2.5 billion deficit recorded in the same period of the preceding year. Lower oil prices in the international market played an important role in reducing the deficits in the trade and services accounts. The country’s foreign exchange reserves reached a record-high level of $20.8 billion at the end of 2015, which is equivalent of five months of the country’s import bill, the SBP noted.

The SBP said Pakistan’s public external debt servicing obligations will not be more than $6 billion per annum until 2020. “This amount appears manageable, especially in view of the existing level of country’s foreign exchange reserves and expected continuation of foreign exchange inflows.” Pakistan’s public external debt servicing was $6.1 billion in 2013-14 and $4.6 billion in fiscal year 2014-15.

The SBP has projected that strong domestic demand and a potential revival in investment in the country will generate additional demand for imported capital goods and raw materials, which will be challenging to finance if foreign exchange earnings fail to keep pace. “The surge in the country’s non-oil import bill in Oct-Dec, along with a rise in trade deficit, flags this dilemma more distinctly,” the SBP said.

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