KARACHI: The private sector credit grew nearly fourfold year-on-year in the first six months (July-December) of the previous fiscal year, the State Bank of Pakistan said in its half-yearly report on the state of Pakistan’s economy on Friday.

The report said this was mainly on the back of working capital requirements that rose due to increased domestic demand, higher exports, as well as the global commodity price hike and an ensuing jump in domestic wholesale prices during July-December 2021-22.

The report noted that soaring global commodity prices, coupled with growing domestic demand, especially for industrial inputs, resulted in a widening of the current account deficit, despite double-digit growth in workers’ remittances to $15.8 billion in 1HFY22.

Exports grew considerably in the first half, notwithstanding some deceleration in the second quarter. Both higher unit prices and export volumes contributed to export growth with a $3.4bn year-on-year increase in 1HFY22 to $15.2bn — “which is highest-ever half-yearly export out-turn”, said the report.

“However, despite slightly slower import momentum in the second quarter, the increase in 1HFY22 imports was nearly four times the increase in exports,” said the report.

Besides the global commodity price hike, import growth was led by elevated demand for raw materials and capital goods; Covid vaccine procurement; and the continued need to import wheat and sugar to plug domestic supply gaps, it said.

“Amid a widening current account deficit, the market-determined exchange rate depreciated by 10.7pc in the interbank market during 1HFY22,” said the report.

The State Bank’s foreign exchange reserves remained relatively stable till the end of 1HFY22, supported by a $1 bn inflow from Eurobond issuance, the additional SDR allocation of $2.8bn from the IMF in Q1, and bilateral deposits of $3bn from Saudi Arabia in Q2.

The report added that the confluence of costlier imported commodities (such as edible oil and pulses) and some demand-side pressures pushed national CPI inflation into double digits during 1HFY22, as the spike in non-perishable food prices more than offset the decrease in the prices of perishable food items. The increase in global commodity prices also led to upward adjustments in administered prices of petrol, LPG, and electricity.

The strength of the economy, the broad-based inflationary pressures and the widening of the current account deficit necessitated a cumulative increase of 275 basis points in the policy rate during 1HFY22.

“This was aimed at ensuring sustainability in both economic growth and the external account, as well as anchoring inflation expectations,” said the report.

On the fiscal side, the overall deficit remained unchanged in 1HFY22 at last year’s level of 2.1pc of GDP. However, the primary balance narrowed to 0.1pc of GDP in 1HFY22, from 0.6pc in the same period last year, as the increase in non-interest expenditures more than offset the robust rise in tax revenues.

Published in Dawn, August 13th, 2022