NationalVOLUME 16 ISSUE # 11


In its first quarterly report for the current fiscal year, the State Bank of Pakistan has painted a positive picture of the national economy which is said to have regained its pre-Covid 19 level in the first quarter (Jul-Sept) of the current fiscal year 2020-21.

All vital indicators show a growth trend in all major sectors, including agriculture, industries and services. According to the SBP, the recovery in economic activities was evident across agriculture, industry, and services sectors. Importantly, external and fiscal sector indicators also remained favourable, underlining that the emerging recovery is being achieved while keeping macroeconomic stability intact.

Within the industry, the report highlights notable growth in cement and food processing sectors, as well as a revival in the automobile sector. Demand indicators, such as cement dispatches, POL and car sales, power generation, consumer financing, and fast-moving consumer goods (FMCG) sales, showed a corresponding rise. In line with the growth in large scale manufacturing (LSM), there was also growth in employment as reflected in the July-August 2020 monthly surveys of industrial employment compiled by the Statistical Bureaus of the Punjab and Sindh.

In agriculture, all major crops, except cotton, surpassed their production targets during the Kharif season. The overall favourable outcome was mainly attributed to an increase in the cultivated area of rice and sugarcane compared to the last year. A major factor in the situation is a recent increase in the wheat support price announced by the government for purchases from farmers in the coming harvesting season and the availability of subsidised fertilisers and pesticides.

Encouraging growth is also expected in the export of rice and textile on the back of the November industrial package, uptick in collection of taxes, continuous strong receipt of workers’ remittances in the months ahead and the outlook for further narrowing down of the current account deficit in the full fiscal year (FY21). The announced increase in the wheat support price and subsidies on fertilisers and pesticides is expected to contribute to a better-than-expected outturn of Rabi crops. In addition, the October 2020 wave of the SBP BCS (Business Confidence Survey) also reflects improved business sentiment, with the Purchasing Managers Index (PMI) turning positive for the first time after eight waves.

All things considered, the real GDP growth is projected to be in the range of 1.5-2.5% in FY21 compared to 0.4% contraction in FY20. Needless to say, this projection is based on the current trends of economic activity in all sectors. At the same time, the outlook for the external sector has improved since the previous set of projections published in the SBP’s FY20 annual report. The current account deficit is now projected to be in the range of 0.5-1.5% of GDP (earlier: 1-2% of GDP). The revision is mainly due to an upward adjustment in workers’ remittances, which are now expected to rise to $24-25 billion (earlier: $22-23 billion).

The new projections for workers’ remittances, however, carry risks as well. Spikes in global Covid-19 infection cases may again slash crude oil prices in world markets and badly impact the oil-exporting GCC economies. This may translate into a sizable reduction in their demand for foreign workers, leading to lower remittance inflows to Pakistan.

The outlook for exports and imports largely remains unchanged from their earlier assessment. The greater quantum of high value-added textile and food commodities – especially rice – is expected to generate above-target growth in exports. The incentives given in the industrial support package since early November 2020 may help textile sector exports perform better.

Imports are projected to surpass their annual target. The increase in food imports and domestic economic activity are mainly expected to drive import growth. However, a sudden increase in global Covid-19 infections and the resulting decline in crude oil prices could lower import payments.

As for the fiscal deficit, the latest projections suggest that it may remain within the annual target of 7% of GDP. Faster-than-anticipated economic revival, which gives the government room to generate more revenues, either by rolling back certain tax concessions or imposing fresh levies, could contain the deficit further. Regarding inflation, the SBP projects it to remain unchanged at 7-9% in FY21. This assessment is based on the latest SBP surveys which reflect well-anchored inflation expectations of both businesses and consumers.

However, there are downside risks to the SBP’s growth projection, including the second wave of Covid-19, which has swept across many countries and may hit Pakistan as well. On the other hand, supply-side shocks from uncertain weather conditions may upset all growth calculations.