SBP ties growth momentum to unhindered economic activities

KARACHI: The central bank on Friday linked the acceleration in growth momentum during the current fiscal year with unhindered economic activities despite the coronavirus outbreak.

“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 economic activity despite Covid-19,” the State Bank of Pakistan (SBP) said in a quarterly report on the state of Pakistan’s economy.

The SBP said long-term lending for industrialisation, the policy-led surge in construction and housing, and increased public sector development program spending are also likely to be key growth drivers.

“While the economy made an encouraging recovery during FY21, certain structural vulnerabilities continue to merit attention,” the SBP 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 agriculture extension departments, particularly to promote the adoption of climate-smart farming practices, could enable better outcomes.

In the external sector, the widening of the merchandise deficit needs to be contained to a sustainable level. Greater self-sufficiency in agriculture, through 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. Discouraging the import of luxury consumer items and promoting greater diversification of exports, in terms of value-added items and destinations, could also help.

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 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 public investment. This calls for an acceleration of efforts to broaden the tax base, increase documentation in the economy, improve public financial management, restructure loss-making public sector enterprises, and reduce circular debt of the power sector.

The SBP said 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, and the services sector, most notably in wholesale and retail trade, played a pivotal role. In the agriculture sector, record output of four out of five important crops – namely wheat, rice, maize and sugarcane – offset the decline in cotton production. Further growth in high frequency demand indicators, such as local cement dispatches, petroleum oil and lubricants and car sales, consumer financing, sales of fast-moving consumer goods, and power generation, reflected the accelerating rebound in economic activity.

“Against this backdrop, real GDP growth is provisionally estimated to be 3.9 percent for the full year, compared to a contraction of 0.5 percent in FY20,” said the SBP.

The SBP said even as the economy rebounded strongly, stability in key macroeconomic indicators on the fiscal and external side were an additional source of comfort, as the current account and primary balance both remained in surplus during July-March FY2021.

The external account received significant support from workers’ remittances – which rose by $4.5 billion to touch a record-breaking level of $21.5 billion during July-March – as well as deferred interest payments on external debt through the G20 debt service suspension initiative, curbs on international air travel, and lower global oil prices. Inflows from commercial, bilateral and multilateral sources were supplemented by new inflows under Roshan digital accounts. Furthermore, the successful completion of the 2nd-5th International Monetary Fund’s reviews unlocked $500 million in direct financing from the fund.

Pakistan reentered the international capital markets after a gap of over 3 years in early April. As a result, SBP’s foreign exchange reserves rose to a three-year high of $13.5 billion by end-March, and the current account remained in surplus through the first three quarters for the first time since FY2004.

The July-March fiscal deficit of 3.5 percent was lower than the 4.1 percent deficit in the comparable period last year. “This was mainly attributed to a rationalization of spending, particularly a slowdown in non-priority current expenditure, and a robust increase in taxes. However, interest payments remained a significant burden, and continued to constrain the fiscal space for development spending.”

The SBP said average headline inflation was lower than last year, both for the July-March FY21 period and for Q3-FY21. The third quarter outturn was mainly attributable to a deceleration in January 2021, led by the food and poultry groups. However, rising prices of electricity, sugar, edible oil, cotton cloth and readymade garments drove up inflation during February and March 2021.