High fiscal deficit, external pressure may pose challenge achieving 6.2pc GDP growth: SBP


KARACHI: State Bank of Pakistan (SBP) on Wednesday said that growing external vulnerabilities and high fiscal deficit may pose challenge in achieving 6.2 percent GDP growth for current fiscal year.
In its third quarterly review for fiscal year 2017/2018, the central bank said that the government set a 6.2 percent real GDP growth target for 2018/2019 largely on the back of accelerating growth momentum of the last few years.
Higher PSDP and CPEC spending, a further ease in power supply, and continuation of industrial expansion plans, are other reassuring factors.
However, the growing external vulnerability and high fiscal deficit will continue to pose major down side risks to the achievement of this target.
Moreover, on the real side, the ongoing dry spell and water shortages may adversely impact the value addition potential of the agriculture sector.
High domestic demand, lagged impact of adjustment in energy prices, and Pak Rupee depreciation are likely to contribute to higher CPI inflation in the current fiscal year.
Smooth supply of staple food items and soft oil price on the other hand could offset these underlying pressures and help keep inflation around the target of 6 percent set for the current fiscal year.
The government has set fiscal deficit target at 4.9 percent of GDP for FY19, which is based on a 12.7 percent anticipated growth in FBR tax revenues and a 10.0 percent increase in expenditures, with greater emphasis on current expenditure. While the current budget has reduced tax rates without rationalizing expenditure, achieving the fiscal deficit target in this backdrop appears challenging.
On the external side, the exports growth prospects remains encouraging on the back of PKR depreciation; recovery in global demand; fiscal incentives for exports; ease in power supply; and improved price outlook of rice and cotton in the international markets. Also, the growth in workers’ remittances is expected to further gather some pace, partly on account of the steps taken by the government and SBP to attract inflows through the official channels.
At the same time, a deceleration in imports is expected due to proactive monetary management by SBP, Pak Rupee depreciation and the continuation of administrative measures to dampen the domestic demand for non-essential import items.
However, the import bill is likely to stay high owing to a notable increase in international commodity prices, especially of oil. This would keep the trade deficit high in FY19 as well.
Furthermore, the FDI inflows are expected to remain lower in FY19 than last year as a number of CPEC energy projects are in their advance stages of completion.
Therefore, in overall terms, the high current account deficit, together with limited financial inflows, would continue to keep the balance of payments under pressure.