KARACHI, January 29, 2019: Pakistan Tehreek e Insaf’s (PTI) economic performance is worst than PML-N as PTI government will miss the GDP growth target of 6.2 percent in its first year (FY19).
After achieving a 13-year high growth of 5.8 percent in FY18-the last year of PML-N government, Pakistan’s economy is showing signs of moderation. Both the agriculture and industrial sectors have under-performed during Q1-FY19 relative to the same period last year.
According to the First Quarterly Report on the State of Pakistan’s Economy for FY19, released by State Bank of Pakistan (SBP) on Tuesday the new political government after coming in power has drastically cut the development spending to bridge the external financing gap, however this cutting will also hurt the domestic growth.
According to SBP the 6.2 percent target for real GDP growth seems unachievable with the policy focus now tilted towards macroeconomic stabilization. As per State Bank estimates, the newly elected government will achieve a 4 to 4.5 percent GDP growth in FY19- the first year of PTI government, which comes in power in July 2015 with ambitious manifesto and economic agenda.
PML-N in its last year (FY18) achieved a 13-year high GDP growth of 5.8 percent. It means, during the first year (FY19) of PTI government the GDP growth will be even less than PML-N’s last year growth.
PTI was comes in power with tall claims and its leadership including Imran Khan (Presently Prime Minister of Pakistan) and Asad Umer (Presently Finance Minister) always criticized the PML-N leadership and their finance minister Ishaq Dar for poor economic policies, however the SBP’s first quarterly revealed that PTI government’s economic performance is more worst the PML-N as agricultural and industrial sector are not performing well.
Average inflation during Q1-FY19 increased to 5.6 percent – the highest quarterly growth since Q1-FY15. While underlying inflationary pressures remained strong, the second-round impact of higher fuel prices and exchange rate depreciation further shored up the NFNE component of CPI. SBP projected that Inflation target will also be missed and inflation by end of June will be 7.5 percent against target of 6 percent for FY19.
According to SBP report, the preliminary economic data suggested that the overall macroeconomic environment remained challenging during the first quarter of FY19 due to steep rise in global crude prices, which not only reinforced the already strong underlying inflationary pressures in the economy, but also eclipsed emerging improvements in the external sector.
Fiscal pressures also remained intact as expenditure rigidities allowed only a limited room for the government to maneuver. Responding to these challenges, the new political regime immediately announced cuts in development spending, partially reversed tax relief measures, and also explored avenues to bridge the external financing gap.
According to the report, the production of all major kharif crops remained lower as compared to the last season, due to lower water availability, which led to a decline in the total area under production. Furthermore, crop yields suffered due to subdued fertilizer offtake amidst rising prices of both urea and DAP.
The large-scale manufacturing also contracted by 1.7 percent during Q1-FY19, after recording a healthy growth of 9.9 percent during Q1-FY18. Noticeably, the output of construction-allied and consumer durable segments, which were the major drivers of growth last year, decelerated on a YoY basis.
The report highlighted that with the underlying inflationary pressures remaining strong and the twin deficits staying at elevated levels, the monetary policy continued to move along the adjustment path. During the two Monetary Policy Committee (MPC) meetings that were held during the quarter, the policy rate was raised by a cumulative 200 basis points.
The report said that besides the persistence of strong demand pressures, the second-round impact of higher fuel prices and exchange rate depreciation pushed up core inflation. As for private credit, a strong expansion was observed during Q1-FY19, in contrast to net retirements witnessed in the same quarter last year. The activity in working capital loans was more prominent, since rising commodity prices and input costs increased the financing requirements of businesses.
The report also observed that the consolidated revenues grew by 7.5 percent during the quarter; however, this pace was lower than the 18.9 percent uptick witnessed during Q1-FY18. Expenditures grew by 11.0 percent during the quarter compared to 13.5 percent in the same period last year. The resultant higher fiscal deficit was financed through increased government borrowing from both domestic and external sources.
On the external front, the report highlighted that the continued exports growth and a steady increase in workers’ remittances partially helped contain the current account deficit. However, the level of this deficit remained a concern, as rising oil prices resulted in the quarterly import bill crossing the US$ 4.0 billion mark. With foreign investments declining on a YoY basis and external borrowing by the private sector remaining subdued, the financial inflows proved insufficient.
Resultantly, pressure on the balance of payments continued to mount, with the country’s FX reserves declining by US$ 1.4 billion and the PKR depreciating by 2.2 percent during the quarter. Nonetheless, financing of the current account might improve going forward as there is an expectation of receiving higher foreign inflows from both private and official sources during the second half of FY19. Not only would this bolster the country’s FX reserves, but also ease pressures in the domestic foreign exchange market.
However, in order to revert to a stable macroeconomic environment over the medium term, the report underlines the importance of the continuation of the right mix of polices. The report lays particular emphasis on initiating the needed structural reforms in order to push the country’s productivity frontier and take the growth momentum forward.