NationalVOLUME 16 ISSUE # 21

Economic uncertainties

Challenges persist for Pakistan despite some improvement in fiscal indicators. External and public finance issues will become serious as the country aims to achieve a higher growth rate to meet the needs of its people, who need jobs and relief from high prices.

According to the State Bank of Pakistan, three areas merit continuing vigilance by policymakers. “First is the burden of debt servicing. Despite a relative improvement in revenue generation, the bulk of interest payments during H1-FY21 was financed via the issuance of new debt. Second, while national CPI inflation declined during H1-FY21 on a yoy basis and stayed within the SBP’s projection for the full year, the prices of food items remain vulnerable to supply-side pressures in recent months. Third, with the domestic economic activity recovering and global commodity prices rising, import pressures are resurfacing. Moreover, these pressures have been accentuated by the domestic supply-side challenges for major agricultural commodities – cotton, sugar and wheat – which necessitated their imports,” the central bank said its second quarterly report on the State of Pakistan’s Economy for fiscal year 2020-21.

The report also dedicates a special section on the domestic LNG market, which discusses challenges in the planning, purchasing, and supply of the imported commodity, and contextualizes the challenges within the current regulatory and operational framework. Going forward, the government’s decision to allow greater involvement of the private sector in LNG import has the potential to address many of these issues, and ultimately enhance the share of the relatively cheaper fuel in the economy’s energy mix, it hoped.

The report highlights the strengthening of the economic recovery during the second quarter of the outgoing fiscal year. It was evident from the growing pace of industrial activity, the promising output of major Kharif crops (with the exception of cotton), and a pick-up in the services sector during the period. The large-scale manufacturing (LSM) grew by 7.6pc during H1-FY21, with its growth in the second quarter accelerating to 10.4pc, the highest quarterly LSM growth since Q4-FY07. Construction-allied and food processing industries generated much of the momentum in industrial activity. The construction industry benefited from the favorable policy environment, which included the government’s fiscal incentives under the construction support package, the Naya Pakistan Housing Scheme, as well as financial measures from the State Bank of Pakistan.

Most of the major Kharif crops performed better than last year and the improvement was attributed mainly to increases in their areas under cultivation. The government’s support package for Rabi crops, comprising subsidies on key inputs, and an increase in the support price for wheat, are likely to bolster the overall crop sector growth. As the economic momentum picked up and the country successfully navigated the second wave of Covid-19 without resorting to strict mobility restrictions, firms’ demand for credit nearly doubled on a yoy basis during H1-FY21.

In the external sector, the current account posted a surplus of US$ 1.1 billion during H1-FY21, driven by record-high workers’ remittances and reductions in the services and primary income deficits. With the current account in surplus and sufficient external financing available, the SBP’s FX reserves increased by US$ 1.3 billion and its net forward liabilities also reduced by US$ 1.2 billion during H1-FY21. Moreover, the rupee appreciated by 5.1pc against the US Dollar during the period. Meanwhile, the newly launched Roshan Digital Accounts were eagerly received by overseas Pakistanis, as inflows into the accounts crossed the US$ 1.0 billion mark in April. On the fiscal side, tax collection was higher compared to last year, while non-interest expenditures declined, resulting in a primary surplus for H1-FY21.

According to the central bank, overall national CPI inflation fell to 8.6pc during H1-FY21, from 11.1pc in the same period last year. “The outcome largely reflected the weakening in core inflation across both urban and rural areas, which was enabled by the presence of spare capacity in the economy, a reduction in energy prices and a relatively stable exchange rate during the period,” the report said.

However, economic uncertainties from the pandemic and political challenges to keeping the reform agenda on track pose risks, Fitch Ratings said in its latest report. “External debt repayments will remain high, at about $8 billion-10 billion per annum over the next few years. The government interest burden as a share of revenue is high, at a Fitch-estimated 38.7pc in FY21, and the narrow revenue base remains a challenge for fiscal sustainability,” it noted.

The World Bank has also revised the growth forecast for Pakistan’s economy to 1.3pc for the outgoing fiscal year compared to 0.8pc projected in January, considering an increase in remittance inflows. However, it is still much lower than the government’s claim of 3.8pc. “The forecast for Pakistan has been revised up on improving remittance inflows and a rebound in confidence, but the economy is expected to grow by only 1.3pc in fiscal year 2020/21, reflecting contracting investment, fiscal consolidation, and depressed activity amid recurring Covid-19 flare-ups,” the World Bank said in its flagship report on global economic prospects. “Recoveries in Pakistan face new headwinds from a recent rise in Covid-19 cases accompanied by rising restrictions to stamp out the new surge. Mobility around places of work and retail has again dropped below pre-pandemic levels,” said the World Bank. Growth in Pakistan will gradually return to 2pc in next fiscal year and 3.4pc in FY2023, according to the World Bank.

Pakistan’s economic performance is impressive but it will have to sustain it for decades to provide real relief to its people. The current account and higher commodity prices are serious challenges. It will also face a serious crisis if remittances drop. Pakistan will have to increase its exports and agriculture produce substantially to provide succor to the common people.