ANALYSIS: Pakistan's economy poised to grow further, but inflation could be a worry

The State Bank of Pakistan (SBP) has projected higher GDP growth and increasing investment and imports, but has cautioned that inflationary pressures may emerge in the months ahead.

The SBP, the central bank, wile highlighting these key indicators, has decided to maintain the interest rate at 5.75 per cent for June and July. This was unveiled in the latest monetary policy and discount rate statement last week.

The SBP said GDP growth in the outgoing FY-2017 will be 5.3 per cent - the highest in 10 years.

At the same time, the World Bank over last the weekend "forecast Pakistan's GDP growth in FY-2017 to climb to 5.2 per cent, the highest expansion rate in nine years, boosted by consumer confidence and fiscal reforms."

"Growth is expected to accelerate to 5.5 per cent in FY-2018 and 5.8 per cent in FY-2019," the World Bank's twice-yearly report on Pakistan said, released on May 20.

The World Bank's country director in Pakistan, Illango Patchamutha, said: "Pakistan's accelerating growth reflects the country's success in building confidence."

"But the pace of reforms has slowed, and it is important for the structural reforms to accelerate. A moderate increase is expected to supplement growth, driven primarily by public and private consumption," he added.

The SBP's monetary statement says "the 5.3 per cent GDP growth in FY-2017 is the highest in the last 10 years." The nine- or 10-year period, referred to in the two reports was shared for two years by military dictator-turned-president General Pervez Musharaff. He was followed by almost five years of rule by Pakistan Peoples Party's president Asif Ali Zardari. Nawaz Sharif ruled in the remaining three years.

The SBP's benchmark interest rate is being maintained at 5.75 per cent. It is in line with financial, banking and equity market expectations, as well as with economists. The experts in these sectors were of the view that this low rate has lent support to the economic uppick since it was introduced in May 2016, and this should continue to push the economy up.

Bank lending to the private sector from July to April in FY-2017 rose to Rs503 billion- up from Rs334 billion in the same period of FY-2016. Most of it was invested in industry.

"The real GDP growth in FY-2017, is provisionally estimated at 5.3 per cent, representing a 10-year high. Specifically, it shows the revival of domestic demand, which has been instrumental in the current upturn."

"The major thrust" for this uptick has been contributed by ongoing public and private investment, particularly in the infrastructure and the power sectors. All these sound good. But the SBP, at the same time, says "inflation, as shown by the headline consumer price index, edged up in the recent months." Inflation may go up in the coming months, following further improvement in economic activity, along with a pass-trough of the recovery in global oil prices affecting domestic fuel cost. Its impact is, however, "likely to remain within the target," it also says.

Mohammad Waheed, senior economist at the World Bank, projects "Pakistan's growth will continue to benefit from growing consumer and the investor confidence following the successful efforts to ensure macroeconomic stability during the last four years."

The upbeat sentiments of the economy and low interest rates have boosted private-sector borrowing from commercial banks for a year. Much of this bank lending has gone into expansion and renewal of industrial capacity. Lending banks and the Federation of Pakistan Chambers of Commerce and Industry also reported the creation of new industrial, particularly to produce modern textiles, and the high value-added fashion-ware. It means the industry is moving in the right mode.

The writer is based in Islamabad. Views expressed are his own and do not reflect the newspaper's policy.

Source: Khaleej Times