The economy of Pakistan experienced adjustments during fiscal year 2019, which includes — the exchange rate was realigned with the market fundamentals; interest rates were sharply increased; Public Sector Development Expenditure was significantly curtailed and energy prices were raised.
These measures were taken to manage the twin deficit crisis, caused by the consumption-led growth of the past few years. The policy actions helped contain demand pressures and contributed to import compression, which led to a significant reduction in the Current Account Deficit. However, in the process, Large-Scale Manufacturing contracted and inflation rose above its target after four years. Meanwhile, high input costs combined with water shortages undermined agriculture sector’s output and the drag in the commodity-producing segments spilled over to the services sector as well. These developments impacted real rural incomes and urban wages, thus constricting the household budgets and ultimately savings and consumption. Resultantly, the real GDP growth fell to its lowest in the past nine years.
Economic outlook for 2020
Real GDP growth is likely to remain subdued, though the early signs of recovery are already visible. Inflation is expected to exceed its annual projection. The Current Account Deficit, after shrinking on YoY basis during FY19, is anticipated to subside further in FY20. Exports are projected to pick up during the year, conditional on demand situation among the country’s major trading partners and buoyancy in commodity markets. Workers’ remittances are expected to remain robust in FY20 on the back of measures taken and incentives given to overseas Pakistanis remitting under the Pakistan Remittance Initiative.
Sectoral Updates
Oil marketing companies:
As battle for market share heats up, Oct’19 volumetric offtake clocked in at 1.6mn tons, moving +7% MoM and -3%YoY with HSD sales continuing to crater on the back of persistent grey-product penetration, whereas changing power mix continues to weigh on FO’s sales (down 19%YoY). In terms of market shares, PSO/APL/HASCOL account for market shares of 46/10/8% during Oct’19 where a comparison with Sep’19 reveals HASCOL increasing its market share by 3ppts while PSO/APL losing theirs by 1ppt each. 8%YoY decline in cumulative POL product sales for 4MFY20 underpins a fall in demand for POL products from the industrial segment mainly as slowing transport demand and economic downturn weighs heavily.
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Cement:
Local sales stage a comeback as local sales for Oct’19 increased by 7%YoY where both regions witnessed contrasting trends as North increased by 17%YoY while South posted a decline of 29%. For 4MFY20, total dispatches increased by 5%YoY where major growth was witnessed in exports of 17%YoY followed by 3%YoY growth in local dispatches. The surprise rebound can be attributed mainly to the demand from private sector where housing schemes resuming/starting production played a part. After the recent increase in North, prices have sustained their ground where weakness has only been in some parts of the region. However, relaxation of axle load can provide some buffer for the players to reduce prices in the wake of upcoming capacity additions.
Fertilizer:
As per data released by NFDC, urea offtake declined 71% YoY and 74% MoM to 119K tons in Oct’19. This takes 10MCY19 urea offtake to 4.49mn tons, down 2% YoY. The ending inventory stands at 886K tons in Oct’19 vs. 212K tons in Oct’18/peak of 1.7mn tons in May’17. Subsidized LNG supply to non-operational fertilizer plants since Oct’18 and 100K tons of urea import remained the main culprits for the inventory build-up. On the other hand, directing the potential subsidy towards small farmers (owning 50% of farmland) could reduce urea price by PKR860/bag.
Important National Developments
Some of the important economic developments during the year are:
- Moody’s changes Pakistan’s outlook to stable from negative, affirms B3 rating
- SBP keeps interest rate unchanged at 13.25%
- Economy shows signs of improvement on IMF support
- IMF allows Pakistan to issue fresh sovereign guarantees of Rs.250billion
- FBR facing Rs.220 billion revenue shortfall in first five months
[box type=”note” align=”” class=”” width=””]The writer is a Karachi based freelance columnist and a banker by profession. He could be reached on Twitter @ReluctantAhsan[/box]