The economy witnessed a modest improvement in FY12 with a real GDP growth of 3.7 percent during the year, compared to 3.0 percent in FY11, according to the State Bank of Pakistan’s (SBP) annual report on the state of the economy for the year 2011-12, released on wednesday.
The report said the growth was more broad-based compared to FY11, as it was evenly distributed across agriculture, industry and the services sector.
The demand side was more insightful, as the growth in FY12 was primarily driven by private consumption, it said, adding that strong worker remittances, a vibrant informal economy and higher fiscal spending supported consumption growth during the year.
The SBP report said food prices remained relatively stable during FY12, which helped bring down overall inflation to 11.1 percent–better than the 12.0 percent projected earlier. “It was this easing that allowed the central bank to reduce the policy rate by 200 bps during the year, which was done to partially revive private sector borrowing, and encourage banks to improve intermediation between private savers and borrowers,” the report added.
According to the report, the external front was positive as remittances posted yet another year of strong growth, which not only helped narrow the current account deficit, but also contributed to economic activity. “In overall terms, the external sector has been less worrying than anticipated at the beginning of the year; however, as financial inflows dried up, the burden of financing the current account deficit and external debt, has fallen on the country’s FX reserves,” the report added.
While services continued to support the economy, commodity producing sectors (agriculture and industry) posted an improvement over FY11, the report said, adding that the growth in agriculture came from livestock and kharif crops, but minor crops witnessed a decline due to the floods in Q1-FY12.
It said the positive spillovers from agriculture, coupled with strong remittances and income support schemes, boosted construction activities and household consumption–both of which helped the manufacturing sector. “In terms of services, there was a sharp improvement in financial sector earnings, driven primarily by the volume of commercial bank financing of the fiscal deficit, and deceleration in fresh non-performing loans (NPLs),” the report said.
Among other factors, SBP’s decision to cut its policy rate by a cumulative 200 bps in H1-FY12 was partially motivated by its concern over commercial banks’ reluctance to extend credit to the private sector. However, in the presence of a risk-free dominant borrower, average bank lending rates fell by only 112 bps, which suggest that banks remain apprehensive about (or uninterested in lending to) the private sector, and were willing to accept lower earnings on government securities, according to the report.
It said the actual outcome in the external sector in FY12 was better: a current account deficit of $ 4.6 billion, and an overall gap of $ 3.3 billion, meant that Pakistan’s FX reserves fell by $ 4.0 billion, against an initial projection of $ 4.4 billion. “Nevertheless, this contributed to a 9.1 percent depreciation of the rupee during the course of the year. The rupee depreciated from November to late December 2011, and sharply so in the last week of May 2012. The first event may have been triggered by the closure of NATO supply routes to Afghanistan, and sustained by rising oil prices; the second adjustment was a brief market panic in response to international developments. In effect, the rupee was impacted more by one-off events than the underlying economic fundamentals,” the report added.
According to the report, the Pakistan economy will grow at about the same rate in FY13 as it did last year (FY12). “We are confident that milder flooding this year and the underlying factors that allowed for 3.7 percent growth in FY12 will largely remain in play,” the report added.
