The State Bank of Pakistan, in its 3rd quarterly report on economy, sees momentum of economic recovery in fiscal year 2021-22 getting further acceleration.
The optimistic outlook was based on the expanding vaccine roll-out and relatively unhindered continuation of economic activity despite Covid-19 while temporary Economic Refinance Facility which provides long-term lending for industrialization, the policy-led surge in construction and housing, and increased Public Sector Development Program (PSDP) spending, were also pointed out as likely key growth drivers.
According to ‘Third Quarterly Report on The State of Pakistan’s Economy the fiscal year 2020-21, issued here on Friday, there was growing evidence that the economic recovery gathered further momentum during the third quarter of FY21.
The report finds turnaround in the services and industrial sector, particularly large scale manufacturing (LSM), as pivotal while in the agriculture sector, record output of four out of five important crops – namely wheat, rice, maize and sugarcane – offset the decline in cotton production.
Further growth in high frequency demand indicators, such as local cement dispatches, Petroleum Oil and Lubricants (POL) and car sales, consumer financing, sales of Fast Moving Consumer Goods (FMCG), and power generation, reflected the accelerating rebound in economic activity.
Pro-active response of policymakers to contain the virus through smart lock downs, prudent and targeted fiscal measures, a highly accommodative monetary policy stance and central bank’s refinance facilities as well as incentives and relief offered by the government and the SBP to households and businesses collectively lifted the economy out of last year’s Covid-induced recession, the report further noted.
Current account and primary balance remained in surplus during Jul-Mar FY21 as the external account received significant support from workers’ remittances – which rose by US$ 4.5 billion to touch a record level of US$ 21.5 billion during Jul-Mar FY21- as well as deferred interest payments on external debt through the G20 Debt Service Suspension Initiative (DSSI), curbs on international air travel, and lower global oil prices.
Inflows over $ I billion in April 2021 under Roshan Digital Accounts supplemented inflows from commercial, bilateral and multilateral sources while successful completion of the 2nd-5th IMF reviews unlocked US$ 500 million in direct financing from the Fund, the reports said adding that due to entry of Pakistan in international capital markets after a gap of over 3 years SBP’s foreign exchange reserves rose to a three-year high of US$ 13.5 billion by end-March 2021, and the current account remained in surplus through the first three quarters for the first time since FY04.
Rationalization of spending and robust increase in taxes kept the Jul-Mar fiscal deficit at 3.5 percent however interest payments remained a significant burden, and continued to constrain the fiscal space for development spending, the spokesperson said adding that the revaluation gains from PKR appreciation and DSSI relief contributed to a reduced pace of debt accumulation during Jul-Mar FY21 compared to the same period last year.
Average headline inflation was lower than last year, both for the Jul-Mar FY21 period and for Q3-FY21. Credit to the private sector was nearly 50 percent higher during Jul-Mar FY21 compared to last year. Through the third quarter, loans of Rs 426.0 billion have been approved, of which Rs 74.0 billion have been disbursed under TERF, which bodes well for investment and growth going forward.
Consumer financing also picked up considerably during the period compared to last year. In addition to auto and personal loans, there was a notable upturn in house financing as banks responded to the SBP’s mandatory targets to increase their housing and construction finance portfolios to at least 5 percent of the banks’ private sector credit by end-December 2021.
The central bank also pointed out certain structural vulnerabilities in agriculture and external sectors and suggested certain policy initiatives in the quarterly report. Referring to decline in cotton production SBP said, “Timely availability of pest-resistant seed varieties and further support from agriculture extension departments, particularly to promote the adoption of climate-smart farming practices, could enable better outcomes.”
Greater self-sufficiency in agriculture, through adoption of better farming and crop management practices, and maintenance of adequate stocks could contain widening merchandise deficit to a sustainable level besides curtailing the need to import commodities such as wheat, sugarcane and cotton) to bridge domestic shortfalls or countering temporary price pressures.
The SBP also stressed on discouraging the import of luxury consumer items and promoting greater diversification of exports, in terms of value-added items and destinations.
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