Economy of Pakistan
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State Bank of Pakistan has released its Annual Report on The State of Paki­stan’s Economy for the fiscal year 2018- 19. According to the report, several policy measures were taken during the year to manage the twin deficits crisis. In particular, adjustment of exchange rate to market fundamentals, curtail­ment in public sector development ex­penditure, and increase in energy pric­es helped contain demand pressures, leading to a welcome reduction in the current account deficit. In this process, however, the large-scale manufacturing sector faced contraction and inflation increased. SBP continued to maintain tight monetary conditions to manage demand and anchor inflation expecta­tions. The SBP’s monetary policy com­mittee (MPC) increased the policy rate in all six decisions during the year, by a cumulative 575 bps.

Reduction in demand pressures coupled with supply side constraints led to the slowing down of economic growth during the year. While all the sectors contributed towards this per­formance, the major drag came from the commodity-producing sectors, namely agriculture and industry. On the agriculture front, water shortages along with rise in input prices under­mined the sector’s output.

The report identifies that despite significant reduction in imports and high level of financial inflows from friendly countries, the overall foreign exchange reserve position remained challenging, as financing of external obligations and current account defi­cit became difficult. Thus, to meet this challenges, Pakistan signed an agree­ment with the IMF towards the end of FY19 for balance of payment support.
The report also explores other de­velopments that remained a source of concern in FY19. For instance, despite sharp decline in development spend­ing, the overall fiscal deficit reached a historic high in FY19; this reveals the fundamental structural deficiencies in the country’s tax system. In addition, the report calls attention to the steady increase in headline inflation during the year. While the hike in energy pric­es and pass through of PKR-deprecia­tion fueled inflation throughout FY19, the upward pressure on prices during the first half of the year could be partly attributed to a demand overhang from FY18 as well. The annual report also outlines the factors which held back the performance of exports in value terms during the review period.

Furthermore, the report points out that certain structural imbalances have been building up over time, in partic­ular the rise in share of non-tradeable services in GDP (which do not add to the exports base), at the expense of the declining share of the commodity-pro­ducing sectors. The report underlines the need to focus on structural reforms aimed at increasing the competitive­ness of Pakistan goods, adapting to the international trends and shifting towards exportable services. It also stresses upon improvement in human capital and productivity for sustainable future growth.

Additionally, the report features a special chapter dedicated to the factors constraining investment in Pakistan, particularly beyond the conventional macroeconomic factors. The chapter identifies the binding policy and legal and institutional constraints that are undermining the country’s ability to mobilize investments to its full poten­tial. It describes challenges faced by in­vestors when it comes to dispute settle­ments, policy advocacy and retention practices, while emphasizing the weak­nesses in the tax collection machinery. The chapter also reflects upon the on­going policy reforms for improving the investment environment and stresses upon elements that will be crucial in future for addressing the problem of under-investment in the country.
SBP releases Annual Report on The State of Pakistan’s Economy