Karachi: The economic developments in H1-FY12 indicate that risks to macroeconomic stability are stemming from the external sector and the continued weaknesses on the fiscal side, the State Bank of Pakistan in its quarterly report said.
The economy is still expected to grow in the range of 3 to 4 percent. Inflationary outlook has improved slightly on account of supply side factors (food). It is expected that FY12 inflation will fall within the range of 11.0 to 12.0 percent, with a bias towards the lower boundary.
In spite the lower fiscal deficit during H1-FY12, containing the overall fiscal deficit to its revised target of 4.7 percent of GDP seems to be challenging. Quarterly data for previous years has shown that the deficit remains relatively higher in the second half of the year.
The achievement of the revised fiscal deficit is dependant on the realization of the envisaged surpluses from provincial governments, which are likely to be lower than expected; Â non-tax revenues, which depends on inflows into the Coalition Support Fund, and the auction of 3G licenses; and strict control over expenditures.
The burden of financing this deficit will fall on the banking system, specifically on commercial banks. Other than growing concerns about the supply of loan-able funds for the private sector, renewed government borrowing from SBP entails rising inflationary expectations in the economy.
On external front, although the current account deficit is expected to be in the range of 1.5 to 2.5 percent of GDP, there is an upward bias to this prediction. Given the fall in financial and capital inflows, funding this modest current account deficit could be challenging. Market players are increasingly concerned aboutwhether the envisaged foreign inflows will materialize in time. This, together with the scheduled repayment of IMF loans (US$ 1.1 billion) during H2-FY12, may draw down SBP’s foreign exchange reserves.
Half way into FY12, the economy is showing signs of a modest improvement. Preliminary data indicates that the commodity producing sector, especially agriculture, is doing better than expected. Services also seem well-placed to gain from robust retail trade activities; transportation; and increased profitability of the banking sector.
 The ample availability of key staple crops and less than anticipated supply disruptions due to floods, played a key role in containing inflationary pressures during the period under review.
Despite these positive developments, risks to macro-economic stability have, nevertheless, increased. Specifically, the position of the external sector weakened at a rate faster than expected; and the fall in financial and capital inflows exerted pressure both on SBP’s foreign exchange reserves and on the Pakistan Rupee.
Data for consolidated fiscal operations indicates a deficit of 2.5 percent of GDP for H1-FY12. This deficit was slightly lower compared to the first half of FY11. The good news is that this came primarily from the revenue side; FBR tax collections reached Rs 840.1 billion during H1-FY12, showing a YoY growth of 27.1 percent. Moreover, SBP profits of Rs 104.0 billion contributed significantly non-tax revenues.
Nevertheless, it is important to note that financing this contained fiscal deficit in H1-FY12 was challenging as compared to H1-FY11. As mentioned earlier, the burden of financing fell squarely on domestic.
Sources, since the expected external inflows did not materialize. Specifically, uncertainty about inflows from the Coalition Support Fund (CSF) and the Eurobond issuances still prevails.
The slowdown in foreign exchange inflows has also raised concerns about country’s balance of payments. Specifically, Q2-FY12 data shows that the overall external account deficit has increased to US$ 1.0 billion compared to US$ 0.8 billion in the first quarter of the year; this takes the H1-FY12 external deficit to US$ 1.8 billion. The composition of the BoP reveals that the current account deficit has widened to US$ 2.2 billion, against an almost nil balance during H1-FY11.
Within the current account, a positive was the growth in worker remittances, which reached US$ 6.3 billion during the first half of the year. Excluding remittances, all other components of the current account deteriorated during the period under review.
The import bill increased on account of higher international oil prices and the import of fertilizer. These two items alone accounted for 60 percent of the increase in imports during H1-FY12. On the other hand, export growth has slowed to 3.9 percent compared to 18.9 percent during the first half of the previous year.6 The deceleration was largely concentrated in Q2-FY12, as exports actually fell on a YoY basis for all three months of that quarter. The fall was driven primarily by a decline in quantum; this is an indication of domestic structural weaknesses, as unit values (prices) actually increased for most of the textile items.
Despite these weaknesses, the size of the current account deficit should not be a major source of concern, given Pakistan’s history. The real challenge is financing the current account deficit, as both debt and non-debt inflows have declined. Quarterly numbers indicate that financial/capital accounts posted a deficit of US$ 0.4 billion during Q2-FY12, which implies that the overall external deficit had to be financed by drawing down foreign exchange reserves. Hence, SBP’s foreign exchange reserves saw a reduction of US$ 1.9 billion during H1-FY12 to US$ 12.9 billion. This decline in reserves was accompanied by a depreciating Pakistan Rupee, which lost 4.4 percent of its value during the first half of the year.
Dear TNT Reader,
At The News Tribe, our mission is to bring you free, independent, and unbiased news and content that keeps you informed and empowered. We are committed to upholding the highest standards of journalism, as we understand that we are a platform for truth.
Apart from independent global news coverage, we also commit our unique focus on the Muslim world. In an age marked by the troubling rise of Islamophobia and widespread misrepresentation of Muslims in Western media, we strive to provide accurate and fair coverage.
But to continue doing so, we need your support. Even a small donation of 1$ can make a big difference. Your contribution will help us maintain the quality of our news and counteract the negative narratives that are so prevalent.
Please consider donating today to ensure we can keep delivering the news that matters. Together, we can make a positive impact on the world, and work towards a more inclusive, informed global society.
Donate Monthly Subscription Annual Subscription