ECONOMIC REPORT

July-March FY19

► What mechanism should Pakistan adopt

for the mitigation of the twin deficit?
► GDP growth tapering off…
► FX monitor?
► Where is the economy heading?

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ECONOMIC REPORT
July-March 2019

1.1 ECONOMIC SNAPSHOT

Inflation (Year-on-Year)

8.2%
9.4% GDP
~$280-290bn
6.8% 6.5% 6.2% 7.2%
5.8%
5.8% 5.1%

Forecasted for
9.4%
Oct-18

Nov-18

Dec-18
Aug-18

Sep-18

Jan-19
Jul-18

Feb-19

Mar-19

FY19
Source: the News

Trade deficit Current account deficit Policy rate

Jul-Mar 2018 Mar 2018 The State Bank of
USD USD Pakistan (SBP), has

~27.2bn ~12.7bn further increased the

policy rate by 50bps
to 10.75% effective
Jul-Mar 2019 Mar 2019 1st April 2019.
USD USD
~23.7bn
- PBS
~7.6bn 10.75%
Remittances Foreign Exchange Reserves
Jul-Mar 2018 16.9
17.4 Mar 2019
USD
16.4 16.4 USD
~14.8bn 14.9
14.0 14.0 13.8
14.8 14.8
~17.4bn
With SBP
Jul-Mar 2019
USD
USD
~16.1bn ~10.5bn
Oct-18

Nov-18

Dec-18
Aug-18

Sep-18
Jun-18

Jan-19

Feb-19

Mar-19
Jul-18

1.2 SOCIAL INDICATORS

Urban Rural

Population
64%
~208 Million
Housing Census 2017 36%
66 years
Life Expectancy

PKR 14,000 to
15,000 per month Literacy rate
(percentage of adult
(Minimum wage rate population)
29%
Current poverty rate 56.4%

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ECONOMIC REPORT
July-March 2019

1.0 MACRO-ECONOMIC HIGHLIGHTS

► Pakistan’s GDP Growth tapered off – World Bank has forecasted that the Country’s GDP growth will slow
down to 3.4% during the current fiscal year and will further decelerate to 2.7% in the following year.
Economic growth is expected to pick up from FY21 when it is forecasted to reach 4%.
► Twin deficit – The current account deficit recorded a sizeable contraction during the nine months ending
March 2019. The trend accelerated during CY19. This coupled with the bilateral inflows eased up the
pressure on SBP’s foreign exchange reserves. Nonetheless, despite the contracting current account deficit,
the fiscal consolidation is slower than anticipated.
► Average Highlight inflation – Average CPI for the period July-March FY19 was 6.79%, compared to an
average of 3.78% for the same period last year.
► Pakistan’s credit rating –S&P Global Ratings lowered its credit rating for Pakistan on 4th February 2019 to
B- from B, partly due to the slow negotiations between the government and the IMF on a financial support
deal.
► CPEC Phase-II – As CPEC moves to Phase II, where industrial and agricultural cooperation starts to
materialize, the FDI inflows shall spread across various sectors. In the Large Scale Manufacturing (LSM)
category, Steel, Cement and other allied industries, Automotive, Oil Refining, Chemicals etc. are sectors
where there is likely to be high Chinese interest. Importantly these would be non debt creating inflows.

1.0 GROSS DOMESTIC PRODUCT GDP non-sectoral growth:

Gross Domestic Product

Overview:
5.8
► Economic growth projections are downgraded as balance of 5.4
payment crisis has forced the government to adopt measures to 4.6
curb aggregate demand. 4
► The World Bank has forecasted that Pakistan’s economic 3.4
growth will slow down to 3.4% during the current fiscal year and 2.7
will further decelerate to 2.7% in 2019-2020, as fiscal and
monetary policies are tightened to address macroeconomic
imbalances.
► Services growth, which has been leading growth in the past, is
projected to decline to 4.4% in FY19 compared to 6.4% in FY16 FY17 FY18 FY19 FY20 FY21
FY18. The growth of the agricultural and industrial sectors will
also reduce significantly in FY19 and FY20. Pakistan’s economic growth will slow down to
3.4%: World Bank
► As the Rupee weakens against the greenback since FY18, the
size of the economy has shrunk in Dollar terms. Pakistan’s GDP composition:
currency has continued to depreciate against its trading
partners over the last six months, with this depreciation being
the highest in the region.
► It is perceived that PKR will continue to depreciate till June
2019, leaving the exchange rate at 145-150 PKR/USD a level
where the real exchange rate parity will be achieved.
► The growth projections may be revised upwards if second
phase of CPEC gathers steam. In the second phase
cooperation will be largely centered around industrial
cooperation and agricultural sector productivity enhancement Agricultural sector Industrial sector
investments. Services sector

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 ECONOMIC REPORT
July-March 2019

2.0 TWIN DEFICIT Deficit (USD billion):

Trade deficit:

Twin Deficit
► Pakistan’s trade deficit was recorded at $23.6bn with a ~13%
reduction during the first nine months of FY19. The exports 44.3
remained at $17.1bn while imports recorded at $40.8bn, a 40.8
contraction by 8% compared to the same period last year.
27.2 23.6
► Though the trade deficit is declining, to effectively tackle the
crises export led growth is of significance. Otherwise, this
stability in balance of trade will be temporary and is likely to
reverse in the future.
5.6 ► The key commodities contributing to the curtailment of the trade 17.1 17.1
deficit, as shown in the adjacent chart, were Mineral Products,
Base Metals, and Machinery and mechanical appliances.
► The imposition of ban on import of furnace oil and increased
regulatory duties on luxury items yielded positive results as the 9M FY18 9M FY19
imported mineral products shown a 17% increase in the current
Exports Imports
fiscal year compared to a growth of 30% in the same period last
year.
Pakistan’s exports remained $17.1 billion,
► Iron and Steel, accounting for ~5% of the imports, witnessed a while imports recorded at $ 40.8 billion during
10% decline in import payments on the back of the Government July to March 2018-19. A ~13% reduction in
imposed anti-dumping Duty (ADD) on top of already imposed Trade deficit during the first nine months of
regulatory duties on finished steel products. the ongoing fiscal year 2018-19

► A significant increase in import last year was reported in capital Source: PBS

goods such as steam and gas-turbines, electric transformers,

parts of auxiliary power plants and other equipment. Machinery Imports by commodities (USD mn):
and mechanical Appliances, making up 12% of the imports,
saw a 23% reduction in import payments.
+17%
► During the period Jul-Mar 2019 PKR devalued by around
10,999

13.15% against USD. The currency has been devalued by

c.25% against USD in 2018. PKR recovered by 0.5% in the first
month of CY19. The impact of recent Rupee depreciation will
9,410

be witnessed in more positive results in exports in the following

months.
► The soaring budget deficit (projected to hit six-year high at 7%),
coupled with high borrowing cost may lead to “crowding out” of
private investments. -23%
5,540

Current Account Deficit:

4,266

► An estimate of the Country’s Current Account Deficit for the -12%

ongoing fiscal year shows reduction of almost ~40% compared
3,055

-11%
2,695

to the first nine months of FY18.

1,888

1,677

► This contraction comes on the back of a reduction in trade

deficit coupled with a notable increase in the workers
remittances.
Mineral Machinery Base Vegetable
► Workers’ remittances saw an uptick of ~9% compared to the Products Metals Products
same period last year, as a result of the increased vigilance on
money laundering, crackdown on hundi/hawala and amnesty 8M FY18 8M FY19
scheme offered earlier in the year.

Sources: PBS, SBP, World Bank

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 ECONOMIC REPORT
July-March 2019

3.0 INFLATION & MONETARY POLICY Average CPI (June-July):

► Until macroeconomic imbalances are alleviated, the outlook is

Inflation & MPS

for slower growth, higher inflation, pressure on the currency and 7.00%
heavy external financing needed to maintain even a minimal
cushion of foreign exchange reserves
Inflationary pressure: 4.16% 3.92%
► Despite seeing one of the most aggressive monetary tightening 2.86%
policies in Asia since 2018, the country’s inflation rose to a five
year high of 9.4% in March FY19, up from 8.2% in February.
► Due to the Country’s import demand being relatively inelastic,
the recent price hike is driven by exchange-rate pass-through to
FY16 FY17 FY18 FY19F
domestic prices.
► The persistence of inflation with tight monetary policy has had The increase in prices will be driven by
sharp negative bearing on the Country’s economic growth. exchange-rate pass-through to domestic
prices
Similarly, the higher prices will have negative consequences for
employment and poverty levels.
Monthly Y-on-Y CPI:
► Once the effect of devaluation is fully absorbed, the price trends
would stabilize due to higher base effect and reduced
purchasing power. 12%

10%
Monetary Policy Mar 29, 2019:
► With an improvement in the external balance as well as an 8%
increase in bilateral official inflows, SBP’s foreign exchange
reserves gradually recovered to US$ 10.7bn. 6%
► The fiscal deficit for July-Dec FY19 was higher at 2.7 percent of
GDP when compared with 2.3 percent for the same period last 4%
year. The targeted level of fiscal deficit for the ongoing year is
likely to be breached. 2%

► Govt. borrowed Rs.3.3tn from SBP and retired Rs.2.2tn from

0%
scheduled banks during the first nine months of the current
Jul-18

Jan-19
Aug-18

Sep-18

Nov-18

Dec-18
Oct-18

Feb-19

fiscal year. Consistent financing of the fiscal deficit through Mar-19

domestic borrowings continue to dilute the impact of the
monetary policy and prolong the consolidation efforts. General Food Non-food
► In this backdrop, the MPC had decided to increase the policy Source: PBS
rate to 10.75% effective 1st April 2019.
Policy rate (Jul-Dec 2018):

10.75%
10%
8.50%
7.50% 10.25%

“ Government is expecting $5 billion to 6 billion

reduction in the trade gap at the close of the

”
Jul-18

Dec-18
Aug-18

Sep-18

Nov-18

Jan-19
Oct-18

Feb-19

Mar-19

year - Younis Dhaga, Commerce Secretary

The State Bank of Pakistan has continued to

increase the policy rate; there is a 50 basis
points increase to 10.75% effective April
2019

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ECONOMIC REPORT
July-December 2018

DEVELOPMENTS SHAPING THE ECONOMY

Recent developments
“First tax recovery made under Panama Papers
investigation”
Sept $

The tax authorities reported their first recoveries under the

2018 investigations into assets held by individuals named in the
Panama and Paradise papers.

“PM Khan forms 18-member Economic

Advisory Council”
Sept
2018 In September, the prime minister had constituted an 18-
member Economic Advisory Council (EAC).

“Saudi crown prince begins Asia tour with $20

billion Pakistan investment pledge”
Feb Saudi Arabia in October stepped forward with a $6 billion
2019 bailout package for Pakistan’s ailing economy.

“Pakistan gets new constraints from FATF to

Oct curb financial crimes”
The Financial Action Task Force (FATF) has handed over
2018 Pakistan its agenda afresh for an action plan in compliance
with the recommendations on global standards against
financial crimes

“World Bank to give $7.5bn to Pakistan

following IMF deal”
Mar Finance Minister Asad Umar said that Pakistan is all set to
2019 avail a bailout package from the International Monetary Fund
(IMF) ranging between $6-8 billion.

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discipline and
selfless devotion
to duty, there is
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worthwhile that
you cannot
achieve.”

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ECONOMIC REPORT
July-March 2019
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