Economic growth with external sector vulnerabilities will remain a challenge

ISLAMABAD: The economic outlook of Pakistan, with the resumption of the International Monetary Fund (IMF) programme, is expected to result in orderly rebalancing between imperatives of economic growth and addressing the external sector vulnerabilities, the Mid-Year Economic Review for FY22 by the Planning Commission showed.

These challenges will remain in the light of the extent of global slowdown arising from the spread of Omicron variant and the expected abatement of global inflation in the commodity prices and the stability of exchange rate movements.

It was mentioned in the review that the recent fiscal adjustment efforts through the Supplementary Money bill is likely to weigh on containing rising growth in aggregate demand.

Despite considerable international geo-political downside risks and emerging commodities super cycle phenomena, it is expected that the economy will reach around the original National Economic Council (NEC) economic growth target of 4.8 per cent for fiscal year 2022, while the industrial sector may witness slight slippage against the target but the services sector is likely to surpass the target. The previous inflation projection will be surpassed by fair margin.

However, the targets set for the external sector will be partially achieved, with import target likely to be breached by a fair margin leading to higher than projected deficits in current and trade accounts.

Fiscal developments are also reliant on fiscal measures proposed in the recently introduced Supplementary Money bill in the Parliament. Based upon developments in the second half of fiscal year 2022, staying close to the FY22 overall fiscal deficit target is likely to be challenged by additional cost of Covid related vaccines and social protection.

Agriculture sector is expected to achieve a full year growth target of 3.5 per cent keeping in view the impressive performance of the Kharif crop and prospects of a good wheat crop. However, agriculture growth is mainly contingent upon availability of certified seed and pesticides during the Rabi season.

Moreover, consistent availability of water and agriculture credit facilities will also help to support achieving the targeted growth.

Kharif crops are at the final stage of harvesting and early output estimates of all three major crops are higher than for the comparable period of last year. Cotton arrivals till January 18, 2022, were 34.4 per cent higher than the comparable period of fiscal year 2021.

However, as the pace of recent arrivals have slowed down, the initial estimates of 8.4 million bales output are unlikely to be realised but the final output will still exceed last year’s cotton output of 7.1 million bales.

Sugarcane production is estimated at 87.7 million tonnes from an area of 1.3 million hectares showing an increase of 8.7 per cent and 8.2 per cent in area and production, respectively, over the last year.

The rice production is estimated at 8.8 million tonnes from an area of 3.5 million hectares showing an increase of 5.8 per cent and 5 per cent in area and production, respectively, over the last year.

The maize production for 2021/22 is estimated at 9 million tonnes from an area of 1.4 million hectares. All these output estimates are showing an improvement over June 2021 estimates.

Wheat production target of 28.9 million tonnes from an area of 9.2 million hectares has been set by FCA in October. Support price, favourable weather conditions and timely availability of quality inputs would be vital to achieve this increased production target by 5.9 per cent over the actual last year’s output of 27.3 million tonnes.

The ongoing short supplies of fertilizers and irrigation water and less rains during Rabi 2021/22 will be the major limiting factors to achieve wheat output target.

Below average rains during the sowing season, lesser availability of irrigation water at 28 per cent and anticipated weather conditions may hamper the growth of Rabi crops. The water availability for Rabi season is lower by 27 per cent compared to last year.

In pursuance of the government’s agenda for promotion of agriculture sector, the State Bank of Pakistan (SBP) has assigned annual indicative agricultural credit disbursement target of Rs1,700 billion for FY22, which is 24.5 per cent higher than last year’s disbursement of Rs1,366 billion.

During the first five months of FY22, agriculture credit of Rs489 billion has been disbursed, which is 3.9 per cent higher than the disbursements during the comparable period of last year.

Industry sector was projected to grow by 6.5 per cent based upon the Large Scale Manufacturing (LSM) target of 6 per cent. However, with the revised full year number of LSM for FY22, achieving targeted 6 per cent growth is now unlikely.

Moreover, the high cost and low supplies of energy inputs is another challenge for the manufacturing sector. Construction sector is expected to post healthy growth due to the construction amnesty scheme and concessional credit availability for the housing sector.

The LSM has recorded a growth of 7.4 per cent during the first half of FY22, as compared to 1.2 per cent over the corresponding period of FY21.

Out of 22 groups, 16 groups contributed positively towards this growth while 6 groups recorded decline in their production during the first half of FY22.

The automobile sector has recorded an annual growth of 69.4 per cent in the first half of FY22 mainly due to high production of cars and jeeps, light commercial vehicles and trucks.

This increase in demand was mainly due to good financing terms offered by banks and rising incomes during the period. Iron and steel, leather, paper and board sectors are the other major contributors toward this growth whereas rubber products and pharmaceuticals adversely affected the growth in the LSM index.

During the first half of FY22, the total cement dispatches were lower by 0.9 per cent, than the corresponding period of last year. Cement dispatches for the domestic market have increased by 1.9 per cent and exports declined by a massive 32.5 per cent for this period.

The local demand of cement has increased due to the various incentives announced by the government for the construction sector that also led the sector to avail 74.5 per cent higher credit during the first half of FY22 as compared to the last year.

The services sector growth is mostly reliant upon performance of commodity producing sectors and imports. The expected revival in the commodity producing sector and higher than anticipated growth in imports will push services sector growth upward.

Higher financial intermediation, and 38 per cent growth in the Information Technology (IT) related services will also provide additional boost to the social and community services sector.

The performance of commodity producing sectors during the first half of FY22 is on track, therefore, the dependent services are also likely to post higher outturns in wholesale and retail trade, transportation and storage etc.

In particular, the Naya Pakistan Housing Initiative has not only contributed towards the growth in construction (Industrial sector) but also led to positive spillover impact in related services sector such as banking and housing services.

IT related exports have increased by 38 per cent, which is the highest growth in the first half of any fiscal year.

The Foreign Direct Investment (FDI) during the first half of FY22 has witnessed growth of 20 per cent, as compared with the same period of last year. Most of the investment has come in financial, communication, oil and gas exploration and power generation sectors.

Credit to the private sector has crossed Rs1 trillion-mark for the first time in the history of the country, which shows upbeat market sentiments and appetite for financing.

The credit offtake by the private businesses has reached to Rs904 billion during the first half of FY22, against the offtake of Rs246 billion during the comparable period of last year.

The credit offtake for fixed investment has increased by 64.6 per cent, while credit for working capital and trade finance has posted growth of 564 per cent during the first half of FY22.

The startup activities in the country attracted unprecedented $350 million investment from the global markets during 2021, which reflects seizing of potential investment opportunities for growing business enterprises.

The Securities and Exchange Commission of Pakistan (SECP) has incorporated the highest number of companies in a calendar year by registering 5764 companies which is 48 per cent higher than 2020.

On the fiscal and external account, slippages are expected as pressures on imports will only gradually moderate and notwithstanding stellar revenue efforts on taxation side, expenditure side will remain under pressure to finance delivery of social sector services and vaccination rollout programmes.