Fiscal stimulus likely to fuel economic recovery in FY2021/22: SBP

KARACHI: Economic recovery is expected to accelerate in the current fiscal year of 2021/22 as fiscal stimulus extended to businesses and households during coronavirus restrictions boosts confidence in the economy, central bank said on Thursday.

“The recovery could already be seen in the more than expected gross domestic product growth during FY2021,” said Dr Reza Baqir, governor State Bank of Pakistan (SBP) at an event titled ‘Ensuring Sustainable Growth and Promoting Digitization,’ organised by the SBP in collaboration with the Federation of Pakistan Chamber of Commerce and Industry (FPCCI).

"The impact of measures are taken to digitalise the financial sector and improving the business environment through improving ease in doing business will help to make it more sustainable," governor Baqir added.

He asked businesses to take full advantage of the existing SBP refinance facilities, which offer loans at a much lower markup rates than the market for targeted purposes to promote exports, financial inclusion, and other key goals.

Governor said since the last meeting of the SBP and FPCCI in August 2019, there has been a significant increase in the support provided by the SBP to the business community.

“The outstanding amount of Exports Refinance, working capital for exporters has doubled from Rs278 billion at the end of August 2019 to Rs564 billion at the end of June 2021.”

The use of long term financing facility, long term fixed concessional finance for any export-oriented business, increased by 53 percent, from Rs165 billion to Rs253 billion since the last meeting with FPCCI, Dr Baqir said.

Concessional loans for renewable energy to promote green Pakistan increased more than five folds, from Rs9 billion to Rs51 billion.

In addition to the above-mentioned support, financing disbursed under Temporary Economic Refinance Facility (TERF), one of SBP’s measures during Covid-19 to support investment, amount to Rs151 billion, whereas the total approved amount has been Rs435 billion.

Businesses also availed financing worth Rs213 billion under Rozgar scheme in the above-mentioned period.

Referring to the current account deficit (CAD) in June 2021, SBP governor said the recent increase in CAD is in line with SBP projections and, based on information available to date, and not a worrisome development in itself.

Based on the international experience of emerging markets, a rising current account deficit may be a cause for concern when the following three symptoms emerge and in Pakistan’s case, none of these symptoms were present.

The first cause for concern would be if the level of the CAD in percent of GDP is very high; in Pakistan’s case SBP projects a CAD in the range of 2 to 3 percent of GDP for this fiscal year which is less than half the level of 6.1 percent in FY18 which led to sustainability.

The second cause for concern would be if the exchange rate is not allowed to adjust in response to a rising CAD as that prevents the market’s own mechanism to limit the CAD; in Pakistan’s case the exchange rate, since its transition to a market based system in June 2019 has continued to display orderly two-way movement and has demonstrated less volatility than more emerging markets with market-based exchange rates.

And the last worrisome symptom, based on international experience would be if a rising CAD is accompanied by rapidly falling foreign exchange reserves that are reaching unsustainably low levels; in Pakistan’s case, and on the contrary, reserves were around $18 as of the end July 2021, more than $10 billion higher than the low at end of FY2019.

On account of these considerations governor Baqir reminded that there were good reasons to be optimistic about continued sustainable growth.