Pakistan’s economy gains momentum in 2020/21: SBP

Shahnawaz AkhterWeb Editor

16th Jul, 2021. 08:56 pm
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KARACHI: The Pakistan economy has made an encouraging recovery during the last fiscal year but certain structural vulnerabilities still require the government’s attention, the State Bank of Pakistan (SBP) reported in its third quarterly report issued on Friday.

In the report titled, The State of Pakistan’s Economy for the fiscal year 2020/21, the central bank said, in the agriculture sector, the secular decline in cotton production needs to be addressed. Timely availability of pest-resistant seed varieties and further support from the agriculture extension departments, particularly to promote the adoption of climate-smart farming practices, could enable better outcomes, it added.

In the external sector, the State Bank of Pakistan said the widening of the merchandise deficit needs to be contained to a sustainable level. Greater self-sufficiency in agriculture, through the adoption of better farming and crop management practices, and maintenance of adequate stocks can reduce the need to import commodities such as wheat, sugarcane and cotton to bridge domestic shortfalls or counter temporary price pressures, it added.

Discouraging the import of luxury consumer items and promoting greater diversification of exports, in terms of value-added items and destinations, could also help, the central bank said, adding that efforts are required to mitigate food inflation, triggered largely by supply-side issues in the management of agriculture commodities.

This may be achieved through better coordination among the federal and provincial food departments, provision of reliable data, vigilant monitoring of stocks and food prices, and timely import of commodities.

The twin burdens of debt servicing and a narrow revenue base are leaving less fiscal room for the public investment, it said, adding: “This calls for an acceleration of efforts to broaden the tax base, increase documentation of the economy, improve public financial management, restructure loss-making public sector enterprises, and reduce the circular debt of the power sector.”

Looking ahead, the economic momentum is expected to accelerate further during FY22. The optimistic outlook is premised on the expanding vaccine roll-out and relatively unhindered continuation of the economic activities, despite Covid-19, the report showed.

The Temporary Economic Refinance Facility (TERF), which provides long-term lending for industrialisation, the policy-led surge in the construction and housing, and increased Public Sector Development Programme (PSDP) spending, are also likely to be the key growth drivers.

According to the report, there was growing evidence that the economic recovery gathered further momentum during the third quarter of FY21.

The turnaround in the industrial sector, particularly large-scale manufacturing (LSM), and the services sector, most notably in wholesale and retail trade, played a pivotal role.

In the agriculture sector, the record output of four of the five important crops, wheat, rice, maize and sugarcane, offset the decline in the cotton production. A further growth in the high frequency demand indicators, such as local cement dispatches, petroleum oil and lubricants (POL) and car sales, consumer financing, sales of Fast Moving Consumer Goods (FMCG), and power generation, reflected the accelerating rebound in the economic activity, the central bank said.

Against this backdrop, the real GDP growth is provisionally estimated to be 3.9 per cent for the full-year 2020/21, compared with a contraction of 0.5 per cent in FY20.

These favourable outcomes were supported by the proactive response of the policymakers to the evolving pandemic, the SBP said, adding that in addition to containment of the virus through smart lockdowns, targeted fiscal support, while containing the deficit, a highly accommodative monetary policy stance, aggressive refinance facilities provided by the SBP to counter the health, employment and cash flow implications of the pandemic, as well as incentives and relief offered by the government and the SBP to households and businesses collectively lifted the economy out of the last year’s Covid-induced recession.

Even as the economy rebounded strongly, the stability in key macroeconomic indicators on the fiscal and external sides were an additional source of comfort, as the current account and primary balance both remained in surplus during July-March FY21, it added.

The report also said the external account received significant support from the workers’ remittances, which rose $4.5 billion to touch a record high level of $21.5 billion during July-March FY21, as well as deferred interest payments on the external debt through the G20 Debt Service Suspension Initiative (DSSI), curbs on international air travel, and lower global oil prices.

Meanwhile, on the financing side, the State Bank said, inflows from commercial, bilateral and multilateral sources were supplemented by new inflows under the Roshan Digital Accounts, which crossed the $1 billion-mark in April 2021.

Further, the successful completion of the second to fifth International Monetary Fund (IMF) reviews unlocked $500 million in direct financing. Also, Pakistan reentered the international capital markets after a gap of over three years in early April 2021. As a result, the SBP’s foreign exchange reserves rose to a three-year high of $13.5 billion by the end of March 2021, and the current account remained in surplus through the first three quarters for the first time since FY04.

The report said the July-March fiscal deficit of 3.5 per cent was lower than the 4.1 per cent deficit registered in the comparable period last year. This was mainly attributed to the rationalisation of spending, particularly a slowdown in the non-priority current expenditures, and a robust increase in taxes.

However, the interest payments remained a significant burden, and continued to constrain the fiscal space for development spending.

Besides the lower fiscal deficit, the revaluation gains from the rupee appreciation and the Debt Service Suspension Initiative relief contributed to a reduced pace of debt accumulation during July-March FY21, compared with the same period of the last year.

The average headline inflation was lower, compared with the last year, both for the July-March FY21 period and for the third quarter of FY21. The third quarter outturn was mainly attributable to a deceleration in January 2021, led by the food and poultry groups, the report said. However, rising prices of electricity, sugar, edible oil, cotton cloth and readymade garments drove up inflation during February and March 2021.

The credit to the private sector was nearly 50 per cent higher during July-March FY21, compared with the last year. The third quarter witnessed a slowdown though, primarily due to retirements of short-term loans.

By contrast, the SBP’s concessionary refinance schemes, such as the Temporary Economic Refinance Facility, continued to spur the off-take of fixed investment loans. Through the third quarter, the loans of Rs426 billion have been approved, of which Rs74 billion have been disbursed under TERF, which bodes well for investment and growth, going forward, it added.

The consumer financing also picked up considerably during the period, compared with the last year. In addition to auto and personal loans, there was a notable upturn in housing finance, as the banks responded to the central bank’s mandatory targets to increase their housing and construction finance portfolios to at least 5 per cent of the banks’ private sector credit by the end of December 2021.

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