SBP notes improvements in first half of fiscal year
–– sees exceptional challenges amid Covid-19
ISLAMABAD: The State Bank of Pakistan (SBP) said Tuesday that the stabilization efforts and regulatory measures yielded notable improvements during the first half of Fiscal year 2020, however noted that the global and domestic spread of Covid-19 has brought an exceptional set of challenges for the country.
According to SBP’s Second Quarterly Report on the State of Economy, the current account deficit contracted to a six-year low, foreign exchange reserves increased, the primary budget recorded a surplus, and core inflation eased.
Importantly, export-based manufacturing showed signs of traction and construction activities picked up, indicating that the economy was on the path of recovery.
Progress under the IMF program remained on track and the credit rating agencies maintained their stable outlook for Pakistan during the review period, it said adding that further improvements would require deep structural reforms to put the economy on a firm path towards sustainable growth.
In case of balance of payments, the report noted that the improvement in current account mostly stemmed from a reduction in the import bill with some contribution from export earnings.
Depressed international commodity prices had partially offset the gains in export volumes offered by a competitive exchange rate.
With the exception of the telecommunications sector, foreign direct investment (FDI) inflows were also about the same level as last year it said and emphasized that reforms needed to be prioritized to attract and sustain higher FDI inflows into the country.
Regarding the fiscal sector, the report noted that the primary budget recorded a surplus, while the fiscal deficit was contained during H1-FY20 compared to the same period last year.
This was due to a significant growth in revenues despite a slowdown in the economy and the compression in imports.
The reversal of earlier tax concessions and implementation of new levies helped increase the revenue collection. Nonetheless, the overall revenue target was missed, highlighting the scope for greater efforts to broaden the tax base and increase documentation in the economy.
The report further highlighted the challenges pertaining to the agriculture sector as the sector appears less resilient to challenges like constrained water availability and climate change.
It said that the cotton crop, in particular, was hit by unfavorable weather, pest attacks and low water availability. Though the prospects for the wheat crop and livestock are encouraging, the decline in cotton production is likely to undermine the agriculture sector’s performance in FY20.
On the inflation front, the report noted that the inflationary pressures continued to build up throughout the first half of FY20. While the non-food-non-energy (NFNE) inflation exhibited stability amid subdued demand conditions in the economy, food inflation surged steeply in both the quarters.
Given that the surge in inflationary pressures was mostly an outcome of supply disruptions, which are typically seasonal and temporary and core inflation did not rise by a commensurate amount, the SBP’s projections for the average headline inflation for FY20 remained broadly unchanged at 11-12 percent.
This was one of the major reasons the Monetary Policy Committee decided to keep the policy rate unchanged during both its September and November meetings during the first half of FY20. – APP