1 Overview
Real GDP growth has maintained its upward trajectory and increased to a decade-
high of 5.3 percent in FY17. Some of the other macroeconomic indicators, such
as subdued inflation, investment growth, and rising private sector credit, also
showed an encouraging picture. However, decline in exports is overshadowing
the otherwise reviving economic activity.
The revival in agriculture Table 1.1: Selected Economic Indicators
during FY17 is especially FY15 FY16 FY17
notable. This was supported by Growth rate (percent)
favorable policy measures, Real GDP1 Jul-Jun 4.1 4.5 5.3
including subsidy on fertilizer, Agriculture Jul-Jun 2.1 0.3 3.5
reduction in sales tax on Industry Jul-Jun 5.2 5.8 5.0
tractors, and increased access o/w LSM Jul-Jun 3.3 2.9 4.9
to finance. Better agriculture Services Jul-Jun 4.4 5.5 6.0
had, in turn, positive spillover Real fixed investment1 Jul-Jun 15.8 6.7 8.3
CPI (period average)a Jul-Mar 5.1 2.6 4.0
for trade and manufacturing
Private sector credit b Jul-Mar 5.7 8.1 9.9
sectors. Further, PSDP and
Money supply (M2)b Jul-Mar 5.7 6.0 5.9
CPEC-related activities also b
Exports Jul-Mar -3.8 -9.4 -1.3
continued to boost construction
Imports b Jul-Mar -0.1 -4.9 14.1
related industries, such as
Tax revenue FBR c Jul-Mar 12.7 17.7 8.2
cement and steel.
Exchange rate (+app/-dep%)b Jul-Mar -3.1 -2.8 -0.01
billion US dollars
The overall improvement in SBPs reserves (end-period) b Mar 11.6 16.1 16.5
business sentiments along with Worker remittances b Jul-Mar 13.6 14.4 14.1
supportive policies (historic FDI in Pakistan b Jul-Mar 0.8 1.4 1.6
low interest rate, high Current account balance b Jul-Mar -2.0 -2.4 -6.1
infrastructure spending and percent of GDP1
better law and order) has Fiscal balanced Jul-Mar -3.8 -3.5 -3.9
encouraged a number of firms Current account balance Jul-Mar -1.0 -1.1 -2.5
to pursue expansion plans. 1: Provisional numbers for FY17.
This was reflected in a Data sources: a Pakistan Bureau of Statistics; b State Bank of
Pakistan; c Federal Board of Revenue; and d Ministry of Finance
significant surge in private
sector credit off-take during FY17, with a sizable share of fixed investment loans.
At the same time, a hefty increase in machinery imports was also noted.
While the imports of machinery, raw material and other capital goods bode well
for the growth potential of the country, these could not be financed completely
from non-debt creating FX inflows, like exports, remittances, and FDI. And while
The State of Pakistans Economy
the country continued to enjoy IFI support and access to international capital
markets, these inflows were not sufficient to finance the higher current account
deficit. As such, SBPs FX reserves declined from US$ 18.1 billion as on end-
June 2016 to US$ 15.3 billion on 9th June, 2017.
As the country has adequate level of FX reserves, despite some decline, there are
no immediate concerns over its external position. However, going forward, it is
imperative to exploit all sources of FX inflows most importantly exports in
order to comfortably finance the rising import demand. Pakistans exports have
been afflicted by a number of structural, institutional and entrepreneurial gaps,
which have constrained the countrys competitiveness for the last many years.1
The government has announced an incentive package for exporters. Moreover,
general interest rates for businesses and special rates for export re-finance are at
historic low. The private sector has the opportunity to fully benefit from these
conditions by modernizing its business processes, investing in research and
development, improving human capital, seeking international certifications, and
meeting quality standards as expected by foreign consumers.
Low tax collection is another challenge faced by the economy. Some tax
measures, like differential tax structure for filers and non-filers can potentially
increase the tax base; however, recent fiscal incentives for investment, exports and
domestic production have led to deceleration in tax collection.2 While importance
of such fiscal relief measures to support growth cannot be overemphasized,
concerted efforts are required to further improve efficiency of the tax system.
Both these challenges, i.e., decline in exports and below target tax collection, are
impacting two key macroeconomic balances current account and fiscal. In order
to maintain the growth momentum and hard-earned economic stabilization, these
balances need to be kept at sustainable levels. For this purpose, both the public
and private sectors have to play their roles: public sector through consistent and
well thought policies; and private sector by enhancing its efficiencies.
1.1 Economic review
Real sector
Pakistans economy grew by 5.3 percent in FY17, up from 4.5 percent growth
1
See SBP Staff Notes 02/17 and Special Section 3 of SBP Annual Report FY15 for detailed
discussions on structural issues affecting exports.
2
For instance, tax relief on fertilizer and pesticides, zero-rating and duty drawback for exporters,
sales tax exemptions on import of new machinery and raw material for textiles, and tax incentives to
new energy projects.
2
Third Quarterly Report for FY17
recorded in FY16. This acceleration was achieved on the back of a strong
performance of agriculture and services sectors, which grew by 3.5 percent and
6.0 percent respectively in FY17, compared with 0.3 percent and 5.5 percent last
year.
The rebound in agriculture was primarily driven by five major crops (i.e. rice,
cotton, sugarcane, wheat, and maize), which posted a growth of 3.5 percent, after
declining 5.0 percent last year. The bumper crops of sugarcane, maize and cotton
compensated for low growth in rice and wheat production.3 The growth in
livestock value added has also increased during the year. However, the
performance of minor crops remained slightly lower as compared to the last year
(see Chapter 2 for detail).
The industrial sector posted a growth of 5.0 percent during FY17, compared with
5.8 percent last year. This moderation came mainly from decline in growth rates
of mining and quarrying and electricity and gas sub-sectors. Against this, the
large-scale manufacturing sector (LSM), a key contributor to industry, grew by 4.9
percent during FY17, compared to 2.9 percent last year.
The improvement in LSM growth was contributed by a wide range of industries,
including sugar, cement, steel, pharmaceuticals, electronics, and heavy vehicles
(like tractors and buses). At a broader level, support to the sector emanated from:
(i) burgeoning domestic demand; (ii) sizable credit off-take; (iii) increased
government development spending; (iv) improved law and order situation; (v)
adequate availability of raw materials; and (vi) ease in energy supplies.4
The higher growth in agriculture and industry also had a positive impact on the
performance of the services sector, with wholesale and retail trade a key
beneficiary. In addition, growth of finance and insurance also went up, mainly
due to high growth in deposits and advances of the banking sector. Meanwhile,
the value addition in general government services remained low as compared to
last year due to a smaller increase in wages and salaries.
Inflation and monetary policy
CPI inflation remained quite stable in the first two quarters of FY17, but picked up
gradually in the third quarter. The average inflation during Jul-Mar FY17 was 4.0
percent, compared with 2.6 percent in the same period last year. However, it is
3
The growth of five major crops during FY17 has been recorded as: wheat (0.5 percent), maize (16.3
percent), rice (0.7 percent), sugarcane (12.4 percent) and cotton (7.6 percent).
4
Total power generation in the country increased by 3,166 GWh in Jul-Mar FY17 (source: NEPRA).
3
The State of Pakistans Economy
still significantly lower than the annual target of 6.0 percent. Some of the uptick
in inflation was a result of partial pass-through of the increase in international oil
prices to domestic POL prices; a surge in global prices of some key food
commodities (like palm oil); increase in medicine prices; and upward revision in
education fees (see Chapter 3 for detail).
This gradual uptick in inflation along with external imbalances had a bearing on
the monetary policy decisions during Jul-Mar FY17. Keeping in view the delicate
balance between macroeconomic risks and ongoing growth momentum, the policy
rate was kept unchanged at 5.75 percent throughout the year FY17. The low
interest rate and benign business environment (as manifested by the countrys
better risk perception), stimulated demand for credit by the private sector, which
reached Rs 438.6 billion during Jul-Mar FY17, against Rs 323.4 billion in the
same period last year. Also, the increase in credit remained broad-based, with
firms borrowing heavily to finance their capital expenditure: fixed investment
loans accounted for 42 percent of the total increase in credit to private businesses
in Jul-Mar FY17.5 The demand for working capital loans also accelerated due to
high input prices and greater availability of raw materials (e.g., sugarcane and
cotton). In addition, to capitalize on the available commodity surplus and
exporting opportunities, trade-related borrowings also went up during the period.
The uptick in credit off-take, along with budgetary borrowings, led to increase in
NDA of the banking system. The government borrowed primarily from SBP and
made retirements to commercial banks the only exception was the third quarter
when commercial banks participated actively in PIB auctions of government
securities. In addition, credit to PSEs (especially energy-related) increased
sharply, mainly to settle payables.6 As a result, the expansion in the net domestic
assets (NDA) of the banking system stood 75 percent higher than the expansion
seen last year. However, this increase in NDA was offset by a decline in the net
foreign assets (NFA) of the banking system, which led to a marginally lower
growth in M2 during Jul-Mar FY17, compared with the last year.
On the supply side, banks had sufficient liquidity available for private sector
lending during Jul-Mar FY17, on the back of high deposit mobilization and lower
government borrowing from commercial banks. Moreover, a better outlook in
terms of investment opportunities and gains in asset quality also played a part in
encouraging banks to expand their credit portfolios.
5
Over 90 percent of the increase in fixed investment loans by textiles was under SBPs long term
financing facility for export oriented projects.
6
See Chapter 3 for more detail.
4
Third Quarterly Report for FY17
Fiscal operations
The fiscal deficit stood at 3.9 percent of GDP during Jul-Mar FY17, compared
with 3.5 percent in the corresponding period last year. This was despite a surplus
of Rs 227.6 billion provided by provinces during this period. In fact, revenue
collection could not buoy up with the growing economic activities and fiscal
needs. Particularly, FBR taxes showed a growth of 8.2 percent in Jul-Mar FY17,
which was half the growth observed last year. Non-tax revenues also declined,
mainly on account of lower receipts under Coalition Support Fund and SBP profit.
Encouragingly, the expenditure side of fiscal operations remained well-managed.
While the growth in current expenditure declined during Jul-Mar FY17 (to 5.8
percent, against 6.5 percent last year), the government managed to maintain a
double digit growth in development expenditures. The current expenditure were
contained despite a significant increase in defense and security-related expenses.
Gross public debt rose to Rs 20.9 trillion as on end-March 2017, showing an
increase of Rs 1.2 trillion during Jul-Mar FY17. A large part of this increase came
from domestic borrowing, while increase in external debt remained moderate.
The debt & liabilities stock increased by US$ 595.6 million during Jul-Mar FY17
and reached US$ 62.0 billion. This lower accumulation in external debt took
place on the back of revaluation gains (US$ 1.5 billion) and increased repayments
made during the period (see Chapter 4 for detail).
External sector
The current account deficit reached US$ 6.1 billion during Jul-Mar FY17 on the
back of a large trade deficit and slowdown in remittances. The trade deficit
swelled due to a decline in exports (-1.3 percent) and a sharp increase in imports
(14.1 percent), which mainly consisted of capital goods and raw materials.
The increase in imports can be explained by continued power and infrastructure
development, expansion plans of a number of industries, and increase in
manufacturing activities. On the other hand, the decline in exports is mainly
attributed to lower quantums despite recovery in global commodity prices (cotton
and rice) during Jul-Mar FY17 (see Chapter 5 for detail).
On the financing side, official external inflows in Jul-Mar FY17 (project, non-
project and commercial loans, and sovereign bonds) stood around the same level
as last year indicating that IFIs and international capital markets are still
supportive of Pakistan and comfortable with its growth trajectory (see Chapter 5
for detail). Besides, both FDI and FPI inflows increased during the period. In
5
The State of Pakistans Economy
addition to China, a significant amount of FDI also came from other countries
through merger and acquisition transactions in food and electronics. 7
However, these inflows were not sufficient to fully offset the widening in the
current account gap. As a result, SBPs liquid FX reserves declined from US$
18.2 billion by end-December 2016 to US$ 16.5 billion by end-March 2017.8
However, the reserves adequacy indicators are still comfortable at this level:
SBPs liquid FX reserves are sufficient to finance over four months of import of
goods.
1.2 Economic outlook
Pakistans macroeconomic indicators continue to improve and solidify grounds for
a sustained upward growth trajectory. In particular, key constraints impeding the
economy from achieving high growth i.e. power supply and security situation
are gradually getting better. In this backdrop, the government envisages a higher
real GDP growth of 6.0 percent for FY18, compared to 5.3 percent recorded in
FY17.
Inflation is expected to remain within the target of 6 percent amidst some pick up
on the back of recovery in global prices of oil and other commodities, and push
from domestic demand factors. Meanwhile, the credit expansion is likely to
maintain its pace with better prospects for investment and business activities.
The FY18 budget has set a fiscal deficit target of 4.1 percent of GDP for the year.
This will be supported by 14 percent growth (Rs 4 trillion) in FBR tax revenues.
Along with continuing some of the relief measures, the budget has also introduced
a number of measures to achieve this enhanced revenue target. On expenditure
side, while containing current expenditure, the budget has created substantial
space for development spending; the PSDP for the next year is budgeted at Rs1
trillion, which is 40 percent higher than revised estimates of Rs715 billion for this
year.
On the external front, the positive spillover of recovery in the global economy,
particularly advanced economies, offers healthier trade prospects. Pakistani
exports could also benefit from this evolving dynamic, if the exporters are able to
diversify their products at competitive prices. The Annual Plan FY18 projects
7
Pakistan received FDI inflows from the Netherlands (US$ 465.6 million) and Turkey (US$ 133.1
million) during Jul-Mar FY17. In the same period, FDI from China amounted to US$ 594.8 million.
8
During this period, Pakistan also repaid US$ 500 million of SAFE China Deposits.
6
Third Quarterly Report for FY17
exports to grow by 6.8 percent, with impetus coming from removal of supply-side
bottlenecks and a better performance by the industrial sector.
The import bill is likely to rise by 7.6 percent (according to the Annual Plan
FY18) due to surge in demand for machinery and equipment. However, the
impact of such imports on the external balance would remain muted due to
availability of financing from IFIs and other bilateral sources.
In sum, the growth prospects of Pakistans economy from FY18 onwards would
largely hinge upon planned infrastructure projects and capacity expansion by
industries. In order to make these plans a success story, enhanced coordination
amongst all public sector institutions would be more crucial. Also, continuity and
consistency in policies, especially those related to investment and industry, would
be necessary to ensure sustainability of the growth momentum.
