The State Bank of Pakistan (SBP) on Monday said real GDP growth during FY19 is likely to moderate significantly, mainly due to slowdown in the growth of the agriculture sector and stabilization measures taken to preserve macroeconomic stability. The SBP released its Second Quarterly Report on The State of Pakistan’s Economy for FY19.

As stated by the report, private sector industrial activities, is unlikely to pick up anytime soon, the full year outlook for manufacturing activities remains subdued. Furthermore, private consumption is going to remain lower due to tighter monetary policy and pass through of exchange rate depreciation that has resulted in both higher energy prices and core inflation. In addition, the prospects for the upcoming wheat crop remain subdued in terms of growth. All these aspects are going to constrain the services sector in the coming months as well. Therefore, SBP has revised down its projection for real GDP growth during FY19 by 0.5 percent to 3.5-4.0 percent.

Regarding price pressures, inflation is expected to remain high in H2-FY19. This is due to the second round impact of recent exchange rate depreciations, an upward adjustment in gas and electricity prices and higher budgetary borrowing from SBP. However, the lagged impact of policy rate increases would be instrumental in keeping demand pressures in check. Acknowledging these risks, SBP continues to project average CPI inflation at 6.5-7.5 percent for the full year.

Incorporating the performance of revenue collection during the second half in the last four years, SBP projects fiscal deficit to further deteriorate by 0.5 percent of GDP, which brings it close to the same level as in FY18.

SBP projects fiscal deficit to further deteriorate by 0.5 percent of GDP, which brings it close to the same level as in FY18

As for the external sector, while the current account deficit has improved by USD 1.7 billion during the first seven months of FY19, it is still high at USD 8.4 billion. Some improvement is expected to continue in the remaining months as imports are likely to contract further on account of moderating domestic demand and relatively low international oil price as compared to that at the beginning of FY19.4 However, merchandize exports are expected to miss the target due to waning demand in certain export destinations. Additionally, this is compounded by the competitive pressures in the international arena and the lack of diversified and higher value added products that can effectively utilise the export quotas allowed under specific trade agreements.

Meanwhile on the external financing front, the efforts of the government have started to materialize in the shape of bilateral inflows from Saudi Arabia, UAE and China. Some of these inflows have already been realized, while rest is due in H2-FY19. Along with the Saudi deferred oil payment facilities, these inflows have an important role in meeting the external financing gap for FY19; thereby, relieving pressure on the foreign exchange reserves and mitigating volatility in the FX market.