SBP calls for deep-rooted structural reforms to ensure economic stability

--'Govt's policy measures affected the performance of industrial sector and dampened manufacturing activities in FY19'

While Pakistan’s economy moved along the

stabilization phase led by demand management policies, vulnerabilities in the
external and fiscal sectors persisted during Jul-Mar FY19, according to the
State Bank of Pakistan’s ‘Third Quarterly Report on the State of Pakistan’s
Economy’.

“This implies that the current stabilization

agenda needs to be reinforced with deep-rooted structural reforms,” the report
maintained.

The central bank revealed that the pace of

economic growth slowed down considerably during FY19, mainly in response to
policy measures taken to curb the twin deficits. These measures affected the
performance of the industrial sector and dampened manufacturing activities in
the country, it added.

“Meanwhile, water- and weather-related

concerns, in tandem with the higher cost of major inputs, took a toll on crop
production. The weak showing by the commodity-producing sectors also
constrained the output of the services sector.

“Moreover, the fiscal deficit deteriorated

further, as a steep fall in non-tax revenues and a slowdown in tax revenue led
the overall revenue collection to stagnate at last year’s level. On the other
hand, expenditure increased sharply during Jul-Mar FY19, specifically the
current expenditure that more than offset the decline in the development
expenditure.”

According to the report, inflation stubbornly

kept an upward trajectory.

“Despite several rounds of policy rate hike since January 2018, the average CPI inflation during Jul-Mar FY19 exceeded the full-year target. Although demand-pull pressures lessened in intensity towards the end of FY19, the Non-Food Non-Energy component continued to climb due to the second round impact of exchange rate deprecation and an increase in energy prices.

“On the external front, the current account deficit (CAD) declined on the back of lower import payments for both goods and services, and decent growth in workers’ remittances. However, given the elevated level of CAD and insufficient foreign investments to fill the financing gap, the country had to resort to bilateral and commercial sources for external financing.|

The report features a special section on power

tariffs in Pakistan. The analysis explains the process of power tariff
determination in the country and assesses why tariffs have not softened despite
the decline in fuel cost. It suggests that capacity payments constitute the
bulk of power tariffs in Pakistan, and a sharp increase in these payments in
recent years has completely offset gains from declining fuel cost.

The report also contains another special section on the outlook of food security in Pakistan. The analysis emphasizes the related challenges that the country may face going forward, such as high population growth and unfavourable water and climatic conditions, unless remedial measures are taken urgently.