KARACHI  -  Real gross domestic product (GDP) maintained its upward trajectory, exhibiting a 13-year high growth of 5.8 percent in fiscal year 2017-18.

Benign inflationary environment and improved law and order situation boosted business sentiments, resulting in higher credit off-take especially for fixed investment. However, this improved economic growth came amid widening twin deficits, which pose challenges for sustainability of the growth momentum, said State Bank of Pakistan's Third Quarterly Report on "The State of Pakistan's Economy" released on Wednesday.

The report pointed out that improvement in the crops sub-sector, especially cotton and sugarcane, paved the way for agriculture to surpass last year's performance. Noteworthy contributions from construction- allied industries owing to China-Pakistan Economic Corridor, and Public Sector Development Programme (PSDP) resulted in a 10-year high growth of the industrial sector.

In particular, better performance of large-scale manufacturing activity was supported by robust domestic demand, improved business environment and capacity expansions in some of the industries.

Strong activity in the commodity-producing sectors also led to the services sector maintaining its growth momentum.

The report cited that sufficient supply of key food items, such as wheat, sugar and rice, resulted in subdued food inflation, which helped to partially offset the higher non-food inflation. The report also observed that the effects of rupee depreciation on inflation came into play during third quarter of fiscal year 2017-18.

As inflationary expectations shored up, SBP increased the policy rate in January 2018. On the external front, the report noted that despite a recovery in exports and remittances, a rebound in global oil prices, and higher transport and machinery imports led to a current account deficit of $12.1 billion- the highest seen during July to March of a fiscal year. Even though financial inflows were higher in this period than that of last year, yet they were still insufficient to finance the current account deficit.

Resultantly, SBP reserves dropped to $11.6 billion by ending March, and the Pak Rupee depreciated by 9.6 percent cumulatively during  July-March financial year 2017-18.

On the fiscal side, the report highlighted the increase in fiscal deficit to 4.3 percent of GDP during July-March fiscal year 2017-18, surpassing the full-year target of 4.1 percent.

Sharp increase in both current and development expenditure, largely emanating from jump in provincial spending, amid slower growth in third quarter of 2017-18, drove the higher deficit.

The revenue growth decelerated, primarily due to a slowdown in direct tax collection on account of lower banks' profitability and voluntary payments. Factors such as higher external borrowings and revaluation impact also made matters worse for the government in the face of Pak Rupee depreciation.

In sum, the sustainability of current growth momentum rests on effectively managing the internal and external gaps. On the external front, there is a need to arrange external financing in the short-term, and resolve structural issues affecting competitiveness in the medium and long term.

On the fiscal side, the rationalising of expenditures may help reduce some stress temporarily, the reforms are needed to expand the tax base and enhance the efficiency of the tax system to put the internal finances in order.