NationalVOLUME 17 ISSUE # 4

New hopes after fresh forecasts

Pakistan’s economic growth has exceeded forecasts made by national and international institutions. The country is expected to grow by over 5pc against 4pc projections. To make the progress sustainable, the government has announced regulatory duties and cash margins to curb imports and avoid the heating up of the economy.

The country’s indicators of growth are positive. Overall revenues have improved by 45pc, exceeding the target by 24pc, primarily because of increasing imports. Initial estimates also suggest a 160pc increase in cotton output so far, showing signs of agricultural uptick, besides increase in large-scale manufacturing. However, the government’s concern is that the economy should not overheat to a level that creates problems for the exchange rate and balance of payment. Therefore, the government has decided to impose regulatory duties and 100pc cash payments for opening of letters of credit for non-essential luxury imports.

According to the State Bank of Pakistan, since its last meeting in July, the Monetary Policy Committee (MPC) noted that the pace of the economic recovery has exceeded expectations. However, the robust recovery in domestic demand, coupled with higher international commodity prices, is leading to a strong pick-up in imports and a rise in the current account deficit, it noted. As the economic recovery now appears less vulnerable to pandemic-related uncertainty, the central bank also reviewed its monetary policy and announced an increase of 25 basis points in the benchmark policy rate, taking it to 7.25pc for the next two months effective from October 1, 2021. The central bank said a greater emphasis was needed on “ensuring the appropriate policy mix to protect the longevity of growth, keep inflation expectations anchored, and slow the growth in the current account deficit”. It noted that over the last few months, the burden of adjusting to the rising current account deficit had fallen primarily on the exchange rate and it was appropriate for other adjustment tools, including interest rates, to also play their due role.

The central bank observed that the stance of monetary policy was still appropriately supportive of growth, with real interest rates remaining negative on a forward-looking basis, adding that it expected the monetary policy to remain accommodative in the near term, with a possible further gradual tapering of stimulus to achieve mildly positive real interest rates over time. The most high-frequency domestic demand indicators such as automobiles, POL (petroleum, oil and lubricants) sales, cement sales and electricity generation continued to depict robust growth. The growth is mirrored in the strength of imports and tax collections. It, however, pointed out that growth in the ongoing fiscal year was now expected towards the upper end of the forecast range of 4-5pc, despite “some greater uncertainty with respect to spillovers from the evolving situation in Afghanistan”.

The current account deficit rose to $0.8 billion in July and $1.5b in August, reflecting both vigorous domestic demand and high global commodity prices. Remittances remained strong, growing by 10.4pc during July-August and exports also performed reasonably well, averaging $2.3b per month, as they were outstripped by imports. As a result, the rupee depreciated by 4.1pc since June.

As business activity gradually resumed in Pakistan after the pandemic, the Asian Development Bank (ADB) has projected Pakistan’s Gross Domestic Product (GDP) growth to reach 4pc in the current fiscal year. The growth forecast witnessed recovery in private investment as consumer confidence and business actively improved amid the ongoing vaccination rollout and various economic stimulus measures announced in the budget. The report noted that investment was expected to strengthen as global sentiment improves and the International Monetary Fund-supported stabilisation programme continued to progress. On the supply side, the outlook for agriculture is encouraging in view of the government’s ambitious Agriculture Transformation Plan, it noted. “The plan aims to achieve food security for a growing population by expanding land under cultivation, revamping extension services, boosting water-use efficiency, developing postharvest storage and food processing plants, augmenting bank credit, and introducing the “Kissan Card” as a digital wallet for the direct and swift transfer of subsidies for seed, pesticides, and fertilizer,” the financial institution said.

Similarly, steady normalisation of global merchandise trade, improved market sentiment and stronger business and consumer confidence is expected from the continuing rollout of the vaccination programme and an accommodative monetary policy, according to the report. It also said that enhanced growth in agriculture and industry and an expected improvement in domestic demand were projected to raise growth in the services sector which will add to improvement in growth in FY22.

Fitch Solutions has also projected Pakistan’s economy to grow by 4.2pc in the current fiscal year, considering that the government and the private sector are determined to ramp up spending and overseas Pakistanis would maintain sending strong workers’ remittances during the year. The growth would be supported by significant improvement in business confidence, accommodative monetary (low interest rate) and fiscal (high public spending) policies, reduced number of Covid-19 cases in the country, the government strategy to control the pandemic through smart lockdown instead of a nationwide one, increased drive to vaccinate the nation and subsidised loan for setting up new factories and expanding the existing one through the central bank initiative of Temporary Economic Refinance Facility (TERF). The UK-based research firm added that imports would rebound strongly and outpace export growth. “With the government likely to continue with its ‘smart-lockdown’ strategy instead of imposing a nationwide lockdown, we do not expect Pakistan’s growth trajectory to be severely curtailed. Additionally, the pickup in the vaccination rate in recent months will likely reduce the possibility of extended lockdowns in the future.”

It also expected the economy to be buoyed by accommodative monetary and fiscal stances; public spending. “A more assured economic outlook will bode well for consumption and investments, bolstering economic growth,” the research firm said. “Indeed, the country’s consumer confidence rose in July, coming in at 44.1, its highest reading since September 2019 (pre-pandemic levels). As a sign of recovering demand, purchases of major items like passenger vehicle sales have surpassed pre-pandemic levels. Additionally, our expectation for still strong remittance growth amid a stronger economic growth outlook in the Gulf Cooperation Council (GCC) economies and the European Union will also support private consumption,” it noted.

To provide relief to the common people, the government has decided to reduce prices of vegetable ghee/oil by Rs45-50 per kg to Rs290 from Rs340 and that of wheat flour to Rs55 per kg. Under an arrangement, flour mills would provide a 20kg bag for Rs1,100. Sugar will also be available across the country at Rs89.75 per kg. The government will start providing cash subsidies on wheat flour, sugar, ghee and pulses from October. It is hoped people will soon start reaping the fruits of the improved economy after facing hard times for many years.