Economy grows beyond targets, inflation goes up

* SBP reports 5% growth in economy in first quarter, compared with only 2.9% in corresponding period last year * Inflation swells to 8.1%, compared with 5.6% last year * Billions of dollars received in shape of IMF aid, CSF money and remittances
Economy grows beyond targets, inflation goes up

KARACHI: Pakistan recorded five percent growth in the first quarter of the current fiscal year, the State Bank of Pakistan said on Friday, beating its target and almost doubling the figure for the same period last year.
The State Bank of Pakistan data for the early months of the financial year began in July, 2013 said GDP grew by 5.0 percent, compared with only 2.9 percent in the first quarter of the last fiscal year. The country has struggled to energise its economy in recent years. Growth has bumped along well below the level experts say is needed to absorb new entrants to the workforce from growing, youthful population. “Since the macroeconomic indicators were favourable at the start of the year, the increase in real GDP growth in fiscal year 2014 was discernible,” the bank said.
Economists had set a growth target for the current financial year of 4.4 percent, and the central bank in earlier reports had forecast growth of four percent. The upbeat first quarter performance came on the back of good performances by the industrial and services sectors, the report said. However the bank warned that inflation swelled to 8.1 percent in the first quarter compared with 5.6 percent in the corresponding period last year. The IMF approved a $6.7 billion bailout loan package for Pakistan in September last year to help the country achieve economic reforms, particularly in its troubled energy sector. The fund also observed that Pakistan’s economy was picking up.
The SBP has projected billion of dollars inflows of foreign exchange in the second half of financial year 2013-14 through various resources, including aid from the International Monetary Fund (IMF), payment against Coalition Support Fund (CSF), realisation of Next Generation Licence for cellular operators and remittances These inflows will help the country stabilise macroeconomic indicators, including its foreign exchange reserves, settling rupee values against dollar and narrowing fiscal deficit in the months to come. 
However, the government should bring structural reforms in energy sector and tax revenue collection to overcome issues of economy in long-term basis, SBP stated in its report issued today. The current account deficit is likely to remain in the range of 1.0 to 1.8 percent of GDP as pressures from inadequate financial flows are likely to ease going forward, as Pakistan has already made bulky repayments to the IMF, and scheduled repayments in the second half of FY14 will largely be compensated by disbursements under Extended Fund Facility (EFF).
More specifically, a net inflow of $4 million is expected from the IMF in Q3-FY14, whereas in Q4 -FY14, net repayment to the Fund will be limited to only $75 million. The receipt of CSF inflows in October 2013, February 2014, and expected inflows of US$ 1.2 billion for the full-year should ease some of the pressures on forex reserves. Moreover, proceeds from the 3G auction are also likely to add $1.2 billion to the country’s forex reserves in H2-FY14. Worker remittances have gathered pace in the second quarter, and may even meet the government’s target of $15.1 billion by end-FY14. 
In addition, the government is expecting financing of around $3.3 billion in the second half of FY14 through various sources including a new Euro Bond; disinvestments through the stock market; privatisation proceeds from Etisalat; and structured transactions. Since the government is expecting significant volume of financial flows from abroad for the rest of the year, an increase is expected in the SBP NFA. However, this increase would largely substitute for the budgetary borrowings from SBP, which are already capped under the IMF programme. 
As a result, a moderate growth is expected in reserve money, albeit with a significant change in its composition, economic growth is likely to remain in the range of 3–4 percent, despite optimistic estimates for Q1-FY14. In fact, the IMF is even more sceptical, and envisages a growth of only 2.8 percent. 

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