The State Bank of Pakistan (SBP) said in its Annual Report on the State of the Economy for the year 2014-15 released on Friday that Pakistan’s economy did reasonably well during FY15 in contrast to a number of other emerging economies that faced slower economic growth.
The real GDP growth increased to 4.2 per cent in FY15, and key macroeconomic indicators like inflation, fiscal balance and current account balance recorded improvement.
The report emphasizes on the improvement in the external sector given its significant positive spillover to the rest of the economy. The external account improved due to a robust growth in worker remittances and a sharp decline in global oil prices. As a result, not only did the country’s FX reserves reach an all-time high level of $18.7 billion by end-June 2015 (sufficient to finance around 5 months of the country’s import bill) but the exchange rate also remained stable during the year. More importantly, improvement in the external account significantly diluted the global risk perception for Pakistan.
The report further explains that the stable PKR parity kept CPI inflation under control and lowered inflation expectations in the country. However, the significant reduction in CPI inflation during FY15 was caused primarily by a sharp decline in oil and other commodity prices. The average CPI inflation fell from 8.6 percent last year to only 4.5 per cent in FY15.
The report said that a stable outlook of inflation and balance of payments allowed policymakers to implement pro-growth strategies. For example, SBP cut its policy rate by a cumulative 350 bps during the year to boost investment activities. Similarly, on the fiscal side, development expenditures by the government remained strong through most of the year, focusing mainly on infrastructure development.
While the report recognizes the fiscal consolidation efforts of the government in terms of controlling expenditure, it also points out structural weaknesses in tax collection. A sharp decline in oil prices and subdued manufacturing activities during the year had made the already sluggish tax collections more difficult. The provincial budget surplus was also recorded lower than the last year’s.
In order to finance the budget deficit, the government relied heavily on commercial banks, the report says. However, encouragingly, the government retired a large amount of its debt to SBP. In the meantime, SBP continued liquidity injections to ensure adequate supply of loanable funds for the private sector. Working capital utilisation declined due to drop in commodity prices. A redeeming feature has been the increase in long term financing which indicates new investment in plants and machinery. Nevertheless, the overall credit to private sector remained lower than that in the previous year.
According to the report, the country was able to marginally reduce its public-debt-to-GDP ratio mainly due to revaluation gain from US dollar’s appreciation against major currencies. The reduction in debt burden was realized despite the successful launch of 5-year Sukuk bond in November 2014, which allowed the government to raise $1 billion against the initial target of $500 million.
While the report welcomed positive developments in the economy, it reiterated several long standing structural constraints low investment rate, low tax-to-GDP ratio, and continuing energy shortages that continue to hinder a sharp economic recovery. The report recognized that improvement in macroeconomic conditions and security situation offered an opportunity to address structural impediments to economic growth on priority basis. The report also emphasized on the need to pursue an effective and well-coordinated industrial policy to expand the industrial and export base. Increasing exports is critical for resolving FX constraints to growth, the report said.
