The good points of the review of economy by the SBP are as
follows:
The major macroeconomic indicators continued to exhibit
improvements in the first half of the current fiscal year. The inflationary
environment stayed benign, LSM gained traction, and fiscal consolidation
remained on track. In addition, successful completion of ninth review under
IMF’s EFF and disbursements from multilateral and bilateral sources added on to
country’s external buffers. With the pickup in private sector credit, for fixed
investment in particular, along with improving security situation reflects
strengthening of investor and consumer confidence.
Average CPI inflation declined to 2.1 percent during
July-December 2015, with perishable food items and motor fuel leading the way.
Meanwhile trend in YoY CPI inflation has reversed; it rose for third
consecutive month to 3.2 percent in December 2015. Keeping in view the benign
outlook of global commodity prices, expectation of a moderate pickup in
domestic demand and further ease in supply side constraints, SBP expects the
average inflation in FY16 to remain in the range of 3 to 4 percent. However,
global oil price trends and excess domestic food stocks (wheat, rice, and
sugar) may exert downward pressures on inflation.
Large-scale manufacturing (LSM) grew by 4.4 percent during
Jul-Nov FY16 as compared to 3.1 percent in the same period last year. LSM
mainly benefitted from monetary easing, falling international prices of key
inputs, better energy situation, increased domestic demand for consumer
durables, and expansion of construction activities. There are challenges to
overall economic performance from the declines in the production of cotton and
rice. However, a part of these losses could be offset by better performance of
other crops, especially from the upcoming wheat crop. In view of these developments,
real GDP is set to maintain the previous year’s growth momentum. The uptick in
economic activity appears to continue beyond FY16 on the back of energy and
infrastructure projects under CPEC.
Pakistan’s overall balance of payment position continued to
strengthen during H1-FY16. The external current account deficit narrowed down
to almost half of the last year’s level on account of persistent decline in
international oil price and steady growth in workers’ remittances. In the
capital and financial accounts, besides strong official inflows, there is some
improvement in foreign direct investment.
Given depressed outlook of international commodity prices,
the external current account deficit is expected to remain lower than last
year. With continuation of the IMF EFF and expected disbursements from other
official sources, the surplus in capital and financial accounts may increase in
the second half of FY16. These are expected to have favorable impact on foreign
exchange reserves. Furthermore, expected increase in FDI from China may help
maintain an upward trajectory in foreign exchange reserves. Reversing of trends
in exports, however, is dependent on external demand and cotton prices in
international market. In addition, easing of domestic constraints with the
completion of ongoing energy projects could help in improving export
competitiveness.
Fiscal deficit was contained to 1.1 percent of GDP during
Q1-FY16, compared to 1.2 percent in the same period last year. This reduction,
despite substantial increase in development expenditures during Q1FY16, was due
to improvement in tax revenues and containment of current expenditures. The
improvement in fiscal accounts may continue in the remaining months of FY16.
While additional tax measures announced in October 2015 are expected to
contribute to growth in FBR revenues, current spending is likely to remain
within target.
The year-on-year growth in broad money (M2) accelerated
largely due to substantial increase in Net Foreign Assets (NFA) of the banking
system. The growth in Net Domestic Assets (NDA) of the banking system
decelerated despite a pickup in private sector credit. On the liability side, deceleration
in growth of deposits and acceleration in currency in circulation are source of
concern.
The credit to private sector increased by Rs339.8 billion
during H1-FY16 as compared to the Rs224.5 billion in same period last year. The
impact of monetary easing, improved financial conditions of the major corporate
sector and better business environment encouraged firms to avail credit not
only for working capital requirements but also for fixed investments. Going
forward, the improvements in LSM, expansion plans announced by major industries
and favorable monetary conditions are expected to provide continued momentum in
the demand for credit.
Some stress in liquidity noticed in Q1-FY16 due to increased
government borrowing from the scheduled banks steadily eased in Q2-FY16 owing
to improved revenue collection and timely receipt of foreign flows. Besides
this, pressures in foreign exchange market also induced volatility in interbank
liquidity requirements. This is also evident from movements in overnight repo
rate which mostly remained slightly above the SBP target rate.
