ISLAMABAD: The first Quarterly Report for the Fiscal Year 2014-15 of the Central Board of Revenue of the State Bank of Pakistan was laid before the Upper House of the Parliament on Tuesday.
Minister of State for Parliamentary Affairs Sheikh Aftab Ahmad on behalf of Finance Ministry presented the said report before the House which was required under section of 9-A(F) of the State Bank of Pakistan Act 1956.
The said report comprised five chapters which cover all the aspects of the state of Pakistan’s Economy. These five chapters further cover the areas including, overview, Real Sector, Agriculture, Large-scale manufacturing and Services. The second chapter covers aspects of economy including Inflation and Monetary Policy, Overview, Money market developments and Monetary aggregates.
Similarly, the third chapter relates to the topics like, Credit to private sector, Inflation, Fiscal Policy and Public Debt and Revenues while the fifth chapter is about Expenditure, Provincial fiscal operations, Public debt, External Sector, Current account, Capital and financial account, Reserves and exchange rate, Foreign trade,
A review of the copy of the said report available with this scribe revealed that the government envisaged GDP growth of 5.1 percent for FY15. It is too early to conclude whether or not this target is achievable; however, preliminary estimates suggest some difficulties in the commodity producing sector.
Farmers reduced the area used for sugarcane cultivation due to lower incomes last year, which caused a decline in its production. Although cotton was grown on a larger area this year, production is expected to remain below-target.
The industrial sector is presenting a mixed picture. Higher cement dispatches, steel imports and strong PSDP spending, suggest a pick-up in construction activity in Q1-FY15.
In contrast, LSM growth posted a decline in Q1-FY15, as local manufacturers faced gas shortages (especially in fertilizer, textiles, paper, glass and leather sectors). Furthermore, textiles also remain dull on account of lower demand for yarn and fabric from China and Bangladesh.
The fall-out of a weak commodity producing sector can also be seen in wholesale and retail trade activity. However, the vibrancy in finance and insurance, and telecommunications, appears to have provided services a boost this year.
While banks’ profitability has been boosted by the volume of PIBs they carry in their portfolio, telecom benefited from the roll out of 3G/4G services in the country. Cellular firms have been spending heavily to upgrade their network, and as customers begin to use the wider set of services; this should have a strong positive impact on other services in the country (e.g., finance, advertising, entertainment, social networking, etc.
Telecom based imports cost an additional US$ 188.3 million to Pakistan’s import bill during Q1-FY15.2 Steel imports added another US$ 233.3 million, whereas textiles (mainly synthetics) and fertilizer together chipped in US$ 166.6 million during the quarter. In overall terms, the country’s imports grew by 11.6 percent during Q1-FY15, compared to only 3.0 percent in the same period last year.3 Commodity prices impacted Pakistan’s exports, which declined by 10.4 percent during Q1-FY15, compared to an increase of 9.0 percent in the same period last year.
The biggest decline was seen in naphtha, where prices are closely related to oil prices. Despite higher production, the export decline probably suggests that traders have been waiting for prices to stabilize (and recover) in the international market, before they offloaded their inventories.
Furthermore, the decline in unit values of knitwear, ready-made garments and towels, eclipsed the quantum increase in export of these commodities. Furthermore, export of yarn and fabric remained low due to faltering Chinese demand, and declining exports of Bangladesh – countries that import textile raw-materials from Pakistan. As a result, the overall trade deficit increased by US$ 1.6 billion in Q1-FY15, compared to the same period last year.
This increase was partly compensated by US$ 765 million increase in home remittances during the quarter. A large part of this increase came from remittances from GCC countries, especially the UAE and Saudi Arabia. Construction-related Pakistani workers are benefiting from higher infrastructure spending in this region (especially Dubai).
Additional support also came from the coalition support fund, which lowered the services deficit by US$ 401 million. In overall terms, this led to a US$ 332 million increase in the current account deficit in Q1-FY15 over last year, to reach US$ 1.6 billion. Financing this deficit remained a concern as foreign investments remained low, and official assistance was less than expected.
Consequently, SBP’s FX reserves declined by 1.7 percent, and the PKR depreciated by 3.7 percent during the quarter. The rising current account deficit, coupled with the uncertainty in the FX market, was one of the key factors that guided SBP’s decision to keep monetary policy tight during the quarter.
The other important factor, CPI inflation, also raised some concerns initially – e.g., fears about flood-re Nonetheless, SBP kept the discount rate unchanged, and also kept rupee liquidity tight in the interbank market.
Overall money supply posted a net contraction of 0.1 percent during the quarter, against an expansion of 0.2 percent in the same quarter last year (these low values reflect the seasonal reduction in M2 during the first quarter of the fiscal year).
In our view, tight liquidity was not the major factor behind this contraction; it was driven primarily by falling net foreign assets (NFA) of the banking system, and relatively contained government borrowing. Private sector credit posted an increase of 1.6 percent in Q1-FY15, compared to net retirement in the same period last year.
As far as government borrowing is concerned, it remained lower than last year because the government was able to borrow more from non-banks via PIBs and NSS. Within the banking system, instead of borrowing from the central bank, the government borrowed from commercial banks, which also remained lower than the same period last year.
Banks’ interest in PIBs persisted throughout the quarter, as the difference in rates between T-bills and PIBs, remained abnormally high. Furthermore, banks had been anticipating a cut in interest rates, which encouraged them to lock-in funds in PIBs
For the government, these placements helped improve the maturity profile of domestic debt, but would continue to increase its servicing burden. More specifically, the 31 percent YoY growth in interest payments during Q1-FY15, was the major factor responsible for a higher fiscal deficit during the quarter.
On the other hand, the government was able to run a primary surplus, which reflects some expenditure restrain. Revenue collection remained weaker than last year: the growth in total revenues came down from 19.9 percent in Q1-FY14, to only 1.2 percent in Q1-FY15.
However, adjusting for the one-off factors that had inflated the non-tax collection last year, the total revenue growth increases to 8.4 percent for Q1-FY15.4 The slowdown in tax revenues basically reflects a decline in collection under the gas development surcharge.
Furthermore, the higher growth in Q1-FY14 had come primarily from a sharp rise in provincial tax revenues (especially by Punjab), that had started collection on services. This base effect was also not available in Q1-FY15.