SBP bullish on growth, sees downside risks from lockdown

KARACHI: The central bank has revised up its growth forecast to 2 to 3 percent for the current fiscal year on reviving large scale manufacturing and better wheat output prospects, but it sees downside risks stemming from a potential COVID-associated lockdown.

“With half of FY21 now passed, the recovery in economic activity is becoming more visible,” the State Bank of Pakistan (SBP) said on Thursday.

SBP expected real GDP growth to exceed the target of 2.1 percent and revised its real GDP forecast for FY21 upwards to 2-3 percent from the earlier range of 1.5-2.0 percent provided in the first quarterly report of FY21.

“This revision mainly incorporates the continuation of recent trends in economic activities, including manufacturing, effective control of COVID’s second wave, positive base effect from the COVID-caused slump in LSM [large scale manufacturing] in Q4 of FY20, and better prospects for wheat output,” it said in the second quarterly report on the state of economy.

“However, as before, the downside risk to the forecast primarily stems from a resurgence in COVID-19 cases with the onset of the third wave, which might necessitate the re-imposition of mobility restrictions.”

The SBP’s full-year consumer price index inflation projection is unchanged in the range of 7-9 percent. The main upside risk to this assessment would come from a substantial increase in international commodity prices. Deepening in any domestic supply-side challenges for food items or utility tariff hikes, may also lead to higher inflation outturns, it said.

The current account deficit is now projected to be in the range of 0-1.0 percent of GDP, against the earlier projected range of 0.5-1.5 percent shared in the first quarterly report of FY21. Based on the recent trend in forex receipts and payments, some factors have changed the projections for remittances and imports. The forecast for remittances has been increased by around 10 percent, based on two main factors. “First is the continued surge in inflows across all the major corridors, despite initial apprehensions that inflows might subside as migrants return to Pakistan. And second is the welcome turnaround in the trend of Pakistanis going abroad for work: work-related emigration from Pakistan rebounded in December 2020, and the trend has continued since then.” The services account is projected to improve further, amid deeper drop in travel services imports after the re-imposition of mobility restrictions in some advanced economies in response to the third wave of COVID-19.

At the same time, the SBP’s projections for import payments have increased by roughly nine percent from the projection provided in the first quarterly report.

“This upward revision in the forecast mostly reflects the momentum in economic activity, additional imports of wheat and sugar, and the increasing trend in global commodity prices, especially crude oil.”

With import volumes of all energy products already higher than last year, rising oil prices from December 2020 onwards have been contributing to the rise in import payments.

In the fiscal sector, the SBP’s projection for the budget deficit is unchanged, reflecting balanced risks. On the downside, the receipt of the gas infrastructure development cess payments after the apex court’s decision would improve the overall fiscal balance. Meanwhile, the upside risk stems from some unbudgeted expenses that the government could likely incur in the remaining part of FY21.

The SBP said macroeconomic outlook for the current fiscal year has improved, after considering the developments during the first two quarters of FY21. Business confidence has also been steadily improving. “The resumption of the IMF [International Monetary Fund] program is expected to unlock additional external financing and also support the country’s progress on the structural reform agenda.”