Economic activity expected to rebound in first quarter of fiscal year 2021

ISLAMABAD: The Ministry of Finance expects a rebound of economic activity in the first quarter of financial year 2021 on the basis of current macroeconomic data compared to the same quarter of last year.

“Looking forward, based on current economic, fiscal, monetary and exchange rate policies and on prospects for the international environment, economic activity is expected to rebound in the first quarter of FY21 compared to the last quarter of previous FY. This rebound may be hampered by climatological events like in August 2020, but in that case, it is expected that any shortfall in economic activity will be recovered in coming months,” the monthly economic update for September 2020 prepared by the Ministry of Finance states.

It further stated that based on current information and in the absence of unexpected shocks YoY (year on year) inflation rate in the Q1 FY 2021 will be substantially lower than the one observed in the Q1 FY 2020.

Fiscal deficit is expected to remain as targeted for Q1 FY 2021. However, the risk of high public spending due to COVID-19 may build pressure on the expenditure side. Regarding revenue collection it remained low in August mainly because of Muharram and heavy rain in Karachi. There is also expectation of higher non-tax revenues. Thus, primary balance is expected to remain in surplus in Q1 FY 2021.

The global economy is now looking for paths to recovery from the COVID-19 crisis. During September 2020, the world economy remained on track of economic recovery as seen in the past months. More specifically the economic activity in Pakistan’s main trading partners continues to recover from the COVID-19 pandemic.

The Weekly Economic Index (WEI) of the Federal Reserve Bank of New York is an index of combination 10 daily and weekly indicators of real economic activity, scaled to align with the four-quarters GDP growth rate in the US; The WEI remains on a further improving trend.

Federal Committee on Agriculture (FCA) in its 14th meeting fixed the Kharif Crops for FY2021 production and cultivation area targets of cotton (10.897 million bales/2310 thousand hectares), rice (7.990 million tonnes/2957 thousand hectares), sugarcane (69.801 million tonnes/1181 thousand hectares) and maize (6.710 million tonnes/1339 thousand hectares). The presence of locust is restricted to Tharparkar in Sindh and Lasbela in Balochistan. Extensive survey in Pakistan is no longer required at present as there is no possibility of migration or breeding in any area except the desert regions of Sindh and Punjab. The control measures at affected places are still in operation. Total area surveyed during 2020 was 536,084 km2 and total area controlled was 11,238 km.

Monthly snapshot of manufacturing activity indicated 9.5 percent growth in July FY 2021 (20.1percent June FY 2020). YOY LSM increased by 5.02 percent in July FY 2021(-5.73 percent July FY 2020). In July FY 2021 production data of LSM from the Oil Companies Advisory Committee (OCAC) comprising 11 items, Ministry of Industries 36 items and Provincial Bureau of Statistics 65 items, have recorded increase of 1 percent, 2.25 percent and 1.77 percent respectively. During July-August FY 2021, total cement dispatches in the country edged up by 21.78 percent to 8.358MT (6.863 MT last year). Domestic dispatches increased by 19.53 percent to 6.747 MT in July August FY 2021 (5.644 MT last year). Exports were up 32.2 percent to 1.611MT (1.218 MT last year). On MOM basis, 12 out of 15 subsectors of LSM have witnessed positive growth in July FY 2021. Textile, having highest weight in LSM, grew by 9.3 percent in July FY 2021. On YOY basis, Coke & Petroleum Products has also improved by 18.3 percent in July FY 2021 after a six-month consecutive decline. Food Beverages & Tobacco, Pharmaceutical, Non-metallic Mineral Products and Paper & Board have also started showing recovery on YOY basis. Automobile sector has also started to recover as car sale increased by 8.3 percent in August FY 2021 on YoY basis. In August FY 2021, total trucks and buses’ production and sale also increased by 5.0 percent and 1.1 percent, respectively on YoY basis.

The headline inflation based on CPI increased by 8.2 percent on YoY basis in August 2020 as compared to an increase of 9.3 percent in the previous month. On MoM basis, it increased by 0.6 percent in August 2020 as compared to an increase of 2.5 percent in the previous month. The two-month average recorded at 8.7 percent as against 9.4 percent during the same period FY 2020.

“This reflects that government has made all out efforts to bring down inflation by ensuring smooth supply of commodities, checking profiteering & hoarding and vigilant monitoring of prices both at federal and provincial level” it added.

During 01st July-11th September FY2021, money supply (M2) observed contraction of Rs 169.3 billion (negative growth of 0.81 percent) against expansion of Rs 28.4 billion (growth of 0.2 percent) last year. Net Foreign Assets (NFA) increased by Rs 344.4 billion compared with Rs 396.3 billion in last year. Net Domestic Assets (NDA) decreased by Rs 513.7 billion against contraction of Rs 367.9 billion last year. Net government sector retired Rs 126.6 billion against borrowing of Rs 145.1 billion in last year. Government has retired Rs 74.7 billion to banking system under budgetary support as compared to borrowing of Rs 159.2 billion last year. Within budgetary support, government has retired Rs 280.1 billion to SBP as compared with the retirement of Rs 774.2 billion last year. Government has borrowed Rs 205.5 billion from scheduled banks for budgetary support against borrowing of Rs 933.4 billion in last year. In latest monetary policy decision, SBP has kept the policy rate unchanged at 7.0 percent.

During July-August FY2021, current account posted a surplus of $ 805 million (1.8 percent of GDP) against a deficit of $ 1214 million last year (-2.8 percent of GDP). Exports declined by 16.6 percent to $3.4 billion during July-August, FY2021 against $4.1 billion last year. On MoM exports decreased by 19.5 percent to $1.5 billion during August 2020 as compared with $1.9 billion in July 2020 mainly due to the heavy rains in different parts of the country. The rains and consequential urban flooding, particularly in Karachi, caused significant problems in the existing infrastructure, disrupted the supply chains and affected the exports for the month of August. However, exports are expected to recover in the coming months owing to resumption of economic activities in the top export destinations for Pakistani goods. Besides, various measures announced by the Government and SBP to safeguard against reduction in export opportunities due to the pandemic would provide further support to the export-oriented sectors. Imports declined by 12.6 percent to $6.7 billion during July-August FY2021 against $7.7 billion last year. Consequently, trade deficit reduced by 8.1 percent to $3.3 billion during July-August FY2021 as compared to $3.6 billion last year. The textile sector exports (more than 60 percent in total exports) decreased by 1 percent in value over the last year. Value added exports (41.0 percent share in total exports) decreased by 4.1percent (value). Basmati rice decline by 40.8 percent (quantity) and 36.4 percent (value). Others rice also decreased by 27.2 percent (quantity) and 18.1 percent (value). The Petroleum group (share of 21.8 percent in total imports) decreased by 24.6 percent (value), of which import of petroleum crude decreased by 7.5 percent (value) and increased by 41.5 percent (quantity).

During July-August FY2021, remittances rose to $ 4.9 billion against $ 3.7 billion last year, with a growth of 31.0 percent. On YoY basis, remittances increased by 24.4 percent to $2.1 billion in August 2020 against $ 1.7 billion in August 2019. On MoM basis, remittances decreased by 24.3 percent in August 2020, recorded $2.1 billion as compared with $ 2.8 billion in July 2020, mainly reflecting the usual seasonal decline in the post Eid-ul Adha period. Share of remittances from Saudi Arabia 29.0 percent ($ 1414.6 million), U.A.E 19.4percent ($ 947.8 million), USA 9.3 percent ($ 452.2 million), U.K 14.3 percent ($ 696.2 million), other GCC countries 10.7 percent ($ 523.0 million), Malaysia 0.8 percent ($ 39.4 million), EU 8.1 percent ($ 394.1 million) and other countries 8.4 percent. 2.5-d Foreign Exchange Reserves Pakistan’s total liquid foreign exchange reserves increased to $19.9 billion by the end of August 2020, up by $4.4 billion over end-August 2019. The breakup of reserves accumulation in August 2020 shows that the SBP’s reserves stood at $12.7 billion ($8.3 billion last year) and $7.2 billion ($7.4 billion last year) in commercial bank’s reserves. The reserves provide the import cover of around 3 and half months.