NationalVOLUME 16 ISSUE # 16

Between hopes and risks

Pakistan’s growth and employment continue to recover and business sentiment has improved after suffering an unprecedented contraction last year. However, the economy still faces serious risks from the pandemic and high international food and oil prices which may add to domestic inflation and woes of the common people.

Pakistan’s Large-scale manufacturing (LSM) grew further by 10.8pc year-on-year in December 2020, and 9.1pc (year-on-year) in January 2021. Through the first seven months of FY21, LSM has grown by 7.9pc, compared to a contraction of 3.2pc during the same period last year. In agriculture, all major kharif crops, except cotton, surpassed production levels in FY20 and targets for FY21, and indicators of input conditions—such as tractor sales, fertiliser use, water availability, and weather—suggest strong prospects, especially for wheat, according to the State Bank of Pakistan.

Pakistan’s current account deficit for February declined by 75pc year-on-year (YoY) and 76pc month-on-month to $50 million, compared to a deficit of $197m in Feb 2020, and $210m last month. Total exports during the month jumped by 3pc to $2.65b compared to $2.58b in the previous month. Similarly, on a yearly basis, total exports increased by 8pc in Feb 2021, against $2.46b in Feb 2020.

The flow of workers’ remittances into Pakistan remained strong at above $2 billion for the ninth successive month in February 2021, which helped the government maintain the country’s foreign currency reserves at stable levels and strengthened its capacity to make international payments smoothly. The country received remittances worth $2.26 billion in February, which was 24pc higher than $1.82 billion in the same month of the previous year.

The International Monetary Fund (IMF) has also completed the second, third, fourth and fifth reviews of the Extended Arrangement under the Extended Fund Facility (EFF) for Pakistan and approved an immediate disbursement of $500 million for Pakistan’s budget support. IMF Deputy Managing Director Antoinette Sayeh said the Pakistani government had made satisfactory progress under the programme, which she termed an important policy anchor during an unprecedented period. “While the pandemic continues to pose challenges, government policies have been critical in supporting the economy and saving lives and livelihoods. The government also continued to advance its reform agenda in key areas, including consolidating central bank autonomy, reforming corporate taxation, bolstering management of state-owned enterprises, and improving cost recovery and regulation in the power sector,” she noted.

According to the IMF, fiscal performance in the first half of the fiscal year 2020-21 was prudent, providing targeted support and maintaining stability. Sustained efforts by the government which included broadening the revenue base, managing its spending and securing contributions from provinces would help achieve a lasting improvement in public finances and place debt on a downward path. The current monetary stance is appropriate and supports the nascent recovery. Entrenching stable and low inflation requires a data-driven approach for future policy rate actions, further supported by strengthening of the State Bank of Pakistan’s (SBP) autonomy and governance, it observed.

While acknowledging recent improvements, the IMF said further efforts were needed to remove structural impediments and strengthen economic productivity and private investment. The efforts needed to include “measures to bolster the governance, transparency, and efficiency of the vast SOE sector; boost the business environment and job creation; and foster governance and strengthen the effectiveness of anti-corruption institutions. Also, completing the much-advanced action plan on Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) is essential, it noted.

The State Bank of Pakistan has also revised the country’s economic growth rate upward to 3pc for the current fiscal year from its November 2020 target of 1.5–2.5pc in FY21 against 2.1pc set by the government. It noted that growth and employment continued to recover and business sentiment had further improved since January. “While still modest, at around 3pc, growth in FY21 is now projected to be higher than previously anticipated due to improved prospects for manufacturing and reflecting in part the monetary and fiscal stimulus provided during the pandemic,” said the Monetary Policy Statement. According to SBP estimates, the recent increase in electricity tariffs and sugar and wheat prices accounts for about 1.5 percentage points of the 3 percentage point increase in inflation between January and February out-turns. A recent increase in electricity prices will continue to manifest in headline numbers in coming months, keeping average inflation in FY21 close to the upper end of the previously announced range of 7-9pc.

However, the SBP noted that despite recent momentum, risks remain due to the emergence of a third, more virulent wave of COVID-19 in Pakistan. In terms of the inflation outlook, the summer’s wage negotiations and any new tax measures in the next year’s budget could add further supply-side shocks. Optimism about a stronger US-led world recovery this year is translating into higher international commodity prices, including both food and oil, which could continue to feed into domestic inflation, it feared. Looking ahead, as the temporary increase in inflation from administered prices (wheat, sugar prices) wanes, inflation should fall to the 5-7pc target range, it hopes.

Undoubtedly, Pakistan’s economic indicators are improving and even the IMF has been impressed with its performance. However, people continue to suffer from high prices, unemployment and mismanagement. The government has taken harsh measures to first qualify for and then revive IMF’s $6 billion programme after it remained suspended for over a year. The government has hiked electricity prices, imposed Rs140b new taxes and agreed to grant unprecedented autonomy to the central bank to revive the programme. The measures would add to the suffering of the people.