S&P improves Pakistan's credit-rating outlook, GDP growth projections

[Muhammad Omar]

The per-capita GDP was estimated to increase 4.3pc to about $1,460 this year, from 5.4pc in 2014. S&P affirmed Pakistan's 'B-' long-term and 'B' short-term sovereign credit ratings. ─ Reuters/File


Standard and Poor's (S&P) Ratings Services on Monday revised projections for Pakistan's average real Gross Domestic Product (GDP) growth for 2015 to 2017 to 4.6 per cent from 3.8 per cent and also upped its outlook on Pakistan's long-term 'B-' credit rating to ‘positive’ from ‘stable’.

The per-capita GDP was estimated to increase 4.3pc to about $1,460 this year, from 5.4pc in 2014. S&P affirmed Pakistan's 'B-' long-term and 'B' short-term sovereign credit ratings.

S&P attributes the largely positive projections to diversification in income generation, the government's efforts towards fiscal consolidation, improvement in external financing conditions and performance, and stronger capital inflows and remittances.

Lower oil prices have also contributed towards bolstering business confidence and investment expenditure.

GDP per capita
GDP per capita is expected to average 2.6pc over the period 2015-2019 due to greater confidence in the agriculture and construction sectors, and in Pakistan's trading partners.

Inflation
Inflation is expected to average 4.8pc over the period 2015-2019. Year on Year Consumer Price Index inflation followed a downward trend starting October 2014, and continues to decline in 2015 according to data in the State Bank of Pakistan Inflation Monitor.

Inflation slowed to 2.1pc in April 2015 from 2.5pc in the preceding month due to lower fuel and food prices ─ the lowest level since 2003.

Read more: Inflation slows to 2.1pc in April

Government deficit
The general government deficit for 2015 is estimated at 4.5pc of the GDP compared to a previous forecast of 5.5pc. The favourable projections have been attributed to improved collections and tightened expenditure mainly in line with International Monetary Fund reforms.

Greater fiscal consolidation of 1pc of the GDP is expected over 2015-2016 through expansion of the tax base, reduction of tax concessions, greater compliance, and reduction of government expenditure on subsidies and public sector salaries.

The average fiscal deficit forecasted for the period 2016-2019 is 3.5pc, while the net general government debt burden is projected to fall to 50.5pc of the GDP by 2019 from 57pc in 2015 as the deficit decreases. Interest expenditure is expected to fall to 25.5pc of government revenue in 2019, from 30.6pc in 2015.

External performance
The decline in the current account deficit to 1.2pc of the GDP in 2014 is partly reflective of lower oil prices, and is expected to average 2pc over 2015-2019.

As of March 2015, foreign exchange reserves ─ including proceeds from privatisation and donor disbursements ─ increased to $11.6 billion from an average of $6b in 2012-2013.

Narrow net external debt is estimated to average 73.4pc over 2015-2019, and the country's external debt burden is expected to remain moderate, as is external liquidity ─ at 106.8pc ─ over the same period.

The improvement in Pakistan's external debt dynamics has eased access to markets and funding costs for the government, but these could be negatively impacted through volatility in global financial markets, increasing oil prices, and a weaker outlook for key trading partners.

Although Pakistan's external performance indicators stabilised further in 2014, they have a predominantly neutral impact on creditworthiness.

Banking sector
The banking system's high profitability and its strong capitalisation contribute to its soundness. The SBP has a long record of keeping inflation at low levels and utilising market-based instruments to regulate policy.

According to S&P, a more diversified financial and capital market would improve credit metrics and transmit policy more effectively.

The sector is still developing risk assessment and prudential measures, which poses a risk to the banking system.

Risk factors
The S&P analysis revealed that Pakistan's internal and external security risks continue threatening governmental and institutional effectiveness. The material risk of domestic conflict and social upheaval continue to challenge policy responses.

Limited transparency and governance, corruption, nepotism and lack of adequate data undermine the effectiveness and stability of Pakistan's policymaking and political institutions.

Low income, weak monetary policy framework and underdeveloped infrastructure ─ particularly in the energy sector ─ and services have negatively influenced fiscal performance.

Export market uncertainty and a weak business climate pose a risk to the growth outlook for Pakistan's economy.

 

[Muhammad Omar]

Pakistan inflation rate falls to 2.11 per cent in April on year

On a month-on-month basis, prices rose 1.32 per cent in April over March. — File photo by Miqdad Sibtain and Anika Dyer

ISLAMABAD: Pakistan's annual inflation rate fell to 2.11 per cent in April from 2.49 per cent in March, the Pakistan Bureau of Statistics said on Monday.

On a month-on-month basis, prices rose 1.32 per cent in April over March.

The average annual inflation rate for July through to April was 4.81 per cent.

“If the price of oil doesn't increase again and there are no other outliers or unexpected incidents, we expect that inflation will stay in this range,” said the bureau's chief statistician, Asif Bajwa.

Read: Inflation at lowest since Sept 2003

Inflation has been on an 11-year low owing to various factors including decline in global oil prices and its impact on Pakistan and the State Bank of Pakistan cutting discount rate by 200 basis points since October 2014.

Falling oil prices decrease the marginal cost of production for firms which in return encourages firms to increase their output, capital and hire more labour.

The developments have resulted in a significant upsurge in the country's business and investor's confidence.

The International Monetary Fund had also predicted that the Average inflation will ease to below 8pc in fiscal year 2014-15 and fall further thereafter, as inflation expectations will be anchored by tight monetary policy and sustainable fiscal policy.

Jeffrey Franks, the IMF’s outgoing mission chief for Pakistan, had said last month: “The economy grew about 4 per cent last year, and we’re expecting a similar figure this year. That’s a good performance considering the country was carrying out major fiscal consolidation.”

“But it’s not enough to substantially improve income levels because of the high population growth rate,” he added.

Understanding inflation rate numbers
The inflation rate for the current fiscal year is 4.8% with the rate in April 2015 reported at 2.1 per cent as compared to April 2014.

When inflation rates fall it does not mean that commodity prices are falling alongside, it rather shows that the pace of increase in prices is less than previously. Therefore, in Pakistan prices are still increasing but the rate of increase is not as steep as before.

This time around, a combination of low fuel prices, close monitoring of cash flow by the State Bank of Pakistan and better supply position of essential commodities due to good crop and limited scope of export (on account of depressed international commodity market) have contributed to bring the inflation rate down to an 11-year-low in Pakistan.

The independent business association (OICCI, ABC, etc.), however, consider the current inflation rate around 10% on the basis of their own calculations of cost of living in the country. They concede that inflation has indeed eased as according to their projections it was around 13% last year.

Experts suspect creative engineering of information by the government to arrive at key data that projects the government and its policies in a positive light. They hint at the choice of items in the consumer basket and the base year used by the Statistical Bureau of Statistics to get politically desired statistics.

With oil prices crawling up, prices in the local market may start rising at a greater pace over the remaining two months of the current fiscal year.