Pakistan to grow 3.4% in FY21: World Bank
KARACHI: The World Bank on Thursday projected Pakistan’s output growth at 3.4 per cent in the current fiscal year, which is revised upward from 1.4 per cent, considering enhanced economic activities.
The World Bank said that the growth further strengthened to 4 per cent in FY23 with the implementation of key structural reforms, particularly those aimed at sustaining the macroeconomic stability, increasing competitiveness and improving financial viability of the energy sector.
The 25-basis points policy rate hike in September 2021 by the State Bank of Pakistan (SBP), fiscal and monetary tightening are expected to resume in the current fiscal year, as the government refocuses on mitigating emerging external pressures and managing longstanding fiscal challenges, it said.
Inflation is projected to edge up in FY22 with the expected domestic energy tariff hikes and higher oil and commodity prices before moderating in FY23.
Poverty is expected to continue declining, reaching 4 per cent by FY23, the World Bank said, adding that the current account deficit is projected to widen to 2.5 per cent of GDP in FY23, as imports expand with higher economic growth and oil prices.
Exports are also expected to grow strongly after initially tapering in FY22, as the tariff reform measures gain traction supporting export competitiveness.
In addition, the growth of official remittance inflows is expected to moderate after benefiting from a Covid-19-induced transition to formal channels in FY21.
Despite fiscal consolidation efforts, the deficit is projected to remain high at 7 per cent of GDP in FY22 and widen to 7.1 per cent in FY23 due to the pre-election spending.
The implementation of critical revenue-enhancing reforms, particularly the general sales tax harmonisation, will support a narrowing of the fiscal deficit over time.
Public debt will remain elevated in the medium-term, as will Pakistan’s exposure to the debt-related shocks.
This outlook assumes that the IMF-EFF programme will remain on-track, the World Bank said.
The report said despite repeated Covid-19 waves, Pakistan’s economy recovered in FY21, amid effective targeted lockdowns and an accommodative monetary policy stance.
The economic growth is expected to ease in FY22 before strengthening again in FY23. However, the potential delays in the IMF programme, high demand-side pressures, potential negative spillovers from the evolving situation in Afghanistan and more severe and contagious Covid-19 waves pose downside risks to the outlook.
Discussing challenges to the Pakistan economy, the World Bank said with the pandemic, the government has been focused on managing the repeated Covid-19 infection waves, implementing a mass vaccination campaign, expanding its cash transfer programme, and providing accommodative monetary conditions to sustain economic growth.
“Grappling with the fourth Covid-19 wave, the government, as before, implemented micro lockdowns that successfully limited the infection spread, while permitting the economic activity to continue and; thereby, mitigating the economic fallout. While they have been accelerating, vaccination rates remain low,” it said.
As of September 15, only around 10 per cent of the total population has been fully vaccinated. The 39-month IMF-Extended Fund Facility (IMF-EFF) is likely to resume in FY22 with the 6th review mission expected in October 2021.
The key reforms included domestic revenue mobilisation, reduction in the power sector arrears, electricity subsidy reform and more central bank operational autonomy, all of which are expected to strengthen long-term growth.
The major downside risks included delays and stalling of the IMF-EFF programme and the consequent external financing difficulties, exceedingly high domestic demand leading to unsustainable external pressures, more contagious Covid-19 strains requiring widespread lockdowns, and a worsening of regional and domestic security conditions, including those stemming out from the Afghanistan situation. All these could delay critical structural reforms.
Due to the low-base effects and recovering domestic demand, the real GDP growth (at factor cost) is estimated to have rebounded to 3.5 per cent in FY21 from a contraction of 0.5 per cent in FY20.
Buttressed with record-high official remittance inflows, received through formal banking channels, and an accommodative monetary policy, the private consumption and investment are both estimated to have strengthened during the year.
The government consumption is also estimated to have risen, but at a slower pace than in FY20 when the Covid-19 fiscal stimulus package was rolled out.
In contrast, the net exports are estimated to have contracted in FY21, as imports growth almost doubled than that of exports due to strong domestic demand.
On the production side, supported by strong large-scale manufacturing, industrial activity is projected to have rebounded after contracting for two consecutive years.
Similarly, the services sector that accounts for 60 per cent of GDP, is estimated to have expanded, as generalised lockdown measures were increasingly lifted.
The agriculture sector growth is expected to have slowed, partly due to a near 30 per cent decline in cotton production on adverse weather conditions.
Despite slowing to 8.9 per cent in FY21 from 10.7 per cent in FY20, headline consumer price inflation remained elevated, mostly because of high food inflation, which is likely to disproportionately impact poorer households that spend a larger share of their income on food items, compared with the non-food items.
With the policy rate being held at 7 per cent throughout FY21, the real interest rates were negative, supporting the recovery.
The current account deficit narrowed to 0.6 per cent of GDP in FY21 from 1.7 per cent of GDP in FY20, as robust remittance inflows offset a wider trade deficit.
Foreign direct investment decreased, while portfolio inflows increased with the issuance of $2.5 billion Eurobonds.
Overall, the balance of payments surplus was 1.9 per cent of GDP in FY21, and the official foreign exchange reserves rose to $18.7 billion at the end of FY21, the highest since January 2017 and equivalent to 3.4 months of the total imports.
Accordingly, the rupee appreciated 5.8 per cent against the dollar over the FY, while the real effective exchange rate rose 10.4 per cent.
In FY21, the fiscal deficit narrowed to 7.2 per cent of GDP from 8 per cent in FY20, as revenue growth, underpinned by stronger domestic activity, outpaced higher expenditures.
The public debt, including guaranteed debt, ticked down to 90.7 per cent of GDP at the end of June FY21 from 92.7 per cent of GDP at the end of June FY20.
Bolstered by the recovery in the industry and services sectors and resultant off-farm employment opportunities, poverty incidence, measured at the international poverty line of $1.90 PPP 2011/day, is expected to have declined to 4.8 per cent in FY21 from 5.3 per cent in FY20.
However, this change is not statistically significant, and downside risks arising from the lockdown-induced disruptions to employment and high food inflation remain.
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