The post July monetary policy decision period continued to
witness stable macroeconomic conditions. This was most visible in the headline
variable of inflation that declined to 7.0 percent YoY in August 2014, the lowest
level since June 2013. Moreover, after recording an improved 4.1 percent growth
rate in FY14, real economic activity is expected to continue in FY15. The other
highlight of this stability is the gains on fiscal liberalization, shrinking
budget deficits, contained government borrowings and improved debt profile.
Following on the actual number of 8.6 percent in FY14, the
average CPI inflation during Jul-Aug 2014 was recorded at 7.4 percent. This
declining trend is broad based since both measures of core inflation, Non-Food
Non-Energy (NFNE) and trimmed mean, also decelerated YoY to 7.8 percent and
7.14 percent in August 2014 as compared to 8.7 percent and 7.9 percent in June
2014, respectively. Although, actual low inflation might weigh positively on
market sentiments, it is the future path of inflation that matters for monetary
policy decision. The current outlook of around 8 percent average CPI inflation
for FY15 might change adversely if the subsidy to electricity is cut and Gas
Infrastructure Development Cess is levied.
After demonstrating low growth since 2008, real economic
activity started to show signs of revival in FY14. Continuation of the current
growth momentum, however, primarily hinges on agriculture productions in FY15.
This is because Large Scale Manufacturing (LSM) growth might remain constrained
due to continued energy shortages; reduced production capacity of independent
power plants; low supply of gas to fertilizer plants; lower domestic and
international prices in the sugar sector; and higher inventories and slower
exports growth prospects in food and textile sectors, respectively.
Incorporating the latest trends in exports and imports, oil
payments in particular, trade deficit is going to dominate the composition of external
current account deficit, even with a healthy growth in workers’ remittances.
Declining private capital inflows, foreign direct investments in particular,
would present continued challenges in managing the balance-of-payments
position. In this regard, realization of expected privatization receipts and
issuance of dollar-denominated Eurobond/Sukuks would be important.
In addition to the risks identified above, ongoing political
impasse, delay in the finalization of fourth IMF review, and the current heavy
rains and floods, which have engulfed central and southern Punjab, threaten the
nascent recovery in economic activity. The former two would weigh more on the
private capital inflows. The latter can potentially disrupt the output and
supply chain of the perishable food items, which challenges an otherwise benign
inflationary outlook. While it is going to take some time before the full
extent of damages arrive, initial opinions and past experiences suggest that
the current floods would damage some khariff crops and may disrupt supply chain
temporarily. Besides having implications for economic growth, floods can also
create macroeconomic imbalances by putting pressures on fiscal and external
sector. Moreover, supply of loanable funds in the credit to private sector
market may also be adversely affected, at least initially. Reflecting these
apprehensions indeed, there is deterioration in SBP-IBA’s Consumer Confidence
Survey of September 2014 as well.
