NationalVOLUME 16 ISSUE # 08

Banking on agriculture

According to the annual State of the Economy report for 2019-20, issued by the State Bank of Pakistan, GDP growth is expected to stay within the range of 1.5–2.5 per cent in FY21 against the target of 2.1pc, set by the government.

As per details, any improvement will be ensured by a steady performance of the agriculture sector and recovery in the services sector, especially finance and insurance and transport and communications.

For the full year, the SBP expects exports to clock in the range of $23.4–23.8 billion in FY21 – higher than the $22.5b recorded in FY20. Similarly, the SBP expects full-year imports to remain higher than the last year, given the anticipated pickup in economic activity following the lifting of lockdowns, and businesses mounting efforts to replenish inventories. A big boost to the industry should come from the concessions given to the construction industry, while progress on housing finance would revive steel imports. According to the SBP report, “The debt servicing relief of $2.7b (equivalent to 1pc of GDP) provided to Pakistan under the G-20’s Debt Servicing Suspension Initiative will help create expenditure space for Covid-19-related spending.”

However, the news on the price front is not encouraging. Overall, the SBP expects headline inflation to fall within the range of 7-9pc in FY21, against the target of 6.5pc. The Consumer Price Index (CPI) in FY20 was 10.7pc. The report says that the fiscal deficit could be in the range of 6.5-7.5pc in FY21, while the government had set the target at 7pc. The fiscal deficit in FY20 was 8.1pc. The SBP estimates the country’s current account deficit in the current fiscal year at 1-2pc against the target of 1.6pc; the deficit was 1.1pc in FY20.

The report predicts that the remittances in FY21 would be in the range of $22-23b, while the target was $21.5b. In FY20, the remittances were $23.1b. With the improvement in Pakistan’s macroeconomic fundamentals, the SBP foresees the economy moving towards recovery on which it had embarked prior to the Covid-19 outbreak, said the report.

The SBP report also underlines that for the first time in Pakistan’s history, the exchange rate depicted orderly two-way movement, reflecting foreign exchange (FX) availability in the interbank market. In fact, the SBP’s net FX reserves buffers increased by approximately $7b during the fiscal year despite the coronavirus outbreak. The economy could also perform much better than presently expected, especially in the context of resurgence in business confidence in the country following the ease in lockdowns and falling Covid-19 cases.

On the minus side, the industrial sector output declined by 2.6 percent in FY20, compared to a contraction of 2.3 percent in FY19. It was the first time that industrial activity contracted for two years in a row, the decline in FY20 mainly coming from a dip in manufacturing and mining activities. In particular, the decline in large-scale manufacturing (LSM) activity was the largest ever registered which, in turn, also weighed heavily on the overall performance due to its sizeable weight of more than 50 percent within the industrial sector.

As pointed out by experts, the stabilisation programme that had moderated domestic demand as well as the lockdowns following the pandemic also affected industrial sector activities. Prior to FY19, LSM growth was positive; however, the subsequent fiscal consolidation, monetary tightening and exchange rate realignment dampened the growth, which was seen starting in FY19. According to the report, in the middle of FY20, signs of nascent recovery started to emerge, but the recovery was cut short by the Covid-19 pandemic, which resulted in a full year contraction of 10 percent in LSM.

The electricity generation and distribution and gas distribution sub-sector posted an expansion of 17.7 percent in FY20, after growing 14.5 percent last year. The gross value addition of the electricity sector contributed significantly to the sub-sector’s performance, which can be attributed to higher output growth relative to intermediate consumption. It is important to recall here that the government had rolled out a comprehensive circular debt reduction plan at the start of the year to improve the viability of the power sector and check the accumulation of arrears.

The SBP report also takes into account some unexpected shocks, which could damage the economic revival projections and prospects. It says that the growth projections are subject to risks, including from the evolution of Covid-19, extreme weather conditions, external demand, and lack of progress on the reform front. “As a result, while a rebound in growth is expected in nearly all the regions in 2021, downside risks remain high,” said the report.

As things stand, the overall global economic outlook remains uncertain due to a high infection rate in some countries, end of temporary unemployment support measures in the US, and continuation of the US trade dispute with China. In the final analysis, how the national economy performs in the coming months will depend on the turns and twists of the global economy.