SBP projects GDP growth at 2.5pc with 9pc inflation for FY21

KARACHI: State Bank of Pakistan (SBP) has projected GDP growth between 1.5-2.5 percent for the current fiscal year 2020/2021 with up to 9 percent average inflation for the year.

The SBP on Wednesday issued annual report on state of economy for the year 2019/2020.

The government has set GDP growth target at 2.1 percent for the current fiscal year as against a negative growth of 0.4 percent in the last fiscal year.

The central bank projected fiscal deficit between 6.5-7.5 percent of the GDP for the current fiscal year lower than 8.4 percent in the last fiscal year. Similarly, current account deficit has been estimated between 1.0-2.0 percent for the ongoing fiscal year.

The inflows of remittances are expected at $22-23 billion during the current fiscal year.

The SBP said that as things stand, Pakistan has managed to control the virus spread. Although fresh infections have posted a slight increase in recent weeks, the overall level of active cases remains significantly lower than the peak observed in June 2020.

While the prevalent risk of another spike calls for a continuation of social distancing norms, the reopening of the economy (including services) has helped reduce some of the uncertainty around the overall macroeconomic outlook.

However, the global containment of the virus still remains elusive. Active cases in the US, the UK, India, France, and Italy remain high. Advanced European economies are bracing for another wave, with rising number of cases witnessed in the UK, Belgium, Italy and Greece. Social distancing norms and localized mobility restrictions are being re-introduced in many countries, whereas recent mobility data also suggests plateauing recovery across many countries.

As a result, while a rebound in growth is expected in nearly all the regions in 2021, downside risks remain high. For now, with the ease in containment measures, retail sales have recovered in the US and the major EU economies, though this recovery was mainly concentrated in groceries, healthcare supplies, and consumer electronics.

Clothing retail sales have yet to recover, as they continued to decline in double digits between June and August in the US and EU. The overall global economic outlook also remains uncertain due to the still-high infection rate in some countries, expiration of temporary unemployment support measures in the US, and continuation of the US trade dispute with China.

These uncertainties continue to present downside risks to Pakistan’s exports growth. Preliminary customs’ records for the first quarter of FY21 show a decline of 0.7 percent YoY in the country’s exports, although a 7.0 percent increase was recorded in the month of September. For the full year, SBP expects export values within the range of US$ 23.4 – 23.8 billion in FY21 – higher than the US$ 22.5 billion recorded in FY20.

Similarly, the SBP expects full-year imports to remain higher than last year, given the anticipated pickup in economic activity following the lifting of lockdowns, and firms’ efforts to replenish inventories. In particular, the concessions for the construction industry and progress on housing finance would revive steel imports. In addition, lower domestic production and supply-management issues have necessitated imports of wheat and sugar.

Energy imports, however, would depend on the ongoing substitution trend between imported and local fuel sources. As for oil prices, though having more than doubled from 19-year lows (US$ 19/bbl) in April 2020, Brent still hovered around US$ 40 per barrel by end-October.

Through the end of CY-2021, the crude oil market is projected to remain range-bound – due to weaknesses in the aviation sector and the risk of re-imposition of lockdowns amid a still high number of active Covid cases.

Given this stability in oil prices, domestic fuel prices are likely to remain steady during FY21. However, as previous adjustments in the power and gas tariffs are due, there is an upside risk to overall energy inflation.

Conditions in the domestic food market are also subject to risk. The recent resurgence in wheat and sugar prices continues to highlight commodity-management problems in the country. Moreover, food prices may also come under pressure due to widespread torrential rains and increased risks of flooding, which may cause crop losses. In contrast, the non-food-non-energy segment of CPI is expected to ease further, as chances of a significant pick-up in domestic demand remain low due to weak financial position of businesses and households.

Overall, the SBP expects headline inflation to fall within the range of 7-9 percent in FY21. On the fiscal side, challenges remain, as the government continues to focus on addressing Covid-related economic and social outcomes and supporting the initial economic recovery.

For the full-year, the government has set the target for the fiscal deficit at 7 percent of GDP, with the primary balance also estimated to show a deficit of 0.5 percent.

Thus, with a tight fiscal position, a significant contraction in grants (social transfers) and subsidy outlay – the two major areas with large slippages in FY20 – is targeted for FY21.

In case of any overshooting under these heads, the debt servicing relief of US$ 2.7 billion (equivalent to 1 percent of GDP) provided to Pakistan under the G-20’s Debt Servicing Suspension Initiative will help create expenditure space for Covidrelated spending.

In terms of growth, the government has set the GDP growth target at 2.1 percent for FY21. This year-on-year improvement is expected to come from a steady performance of agriculture and a recovery in the services sector, especially finance & insurance, and transport & communications. Industrial performance is also estimated to post a modest recovery, primarily on account of a much contained contraction in large-scale manufacturing as compared to FY20.

The SBP expects GDP growth to stay within the range of 1.5 – 2.5 percent during FY21. Nonetheless, these growth projections are subject to risks, including from the evolution of Covid, extreme weather conditions, external demand, and progress on the reform front. In particular, earlier estimates for kharif crops (especially cotton) do not seem promising, given weaknesses in farmers’ financial condition and heavy rains causing losses to standing crops.

There are also some upside risks, especially in the context of a resurgence in business confidence in the country following the ease in lockdowns and falling Covid cases.

The August wave of the IBA-SBP confidence surveys suggests that the business confidence index not only posted a sharp surge compared to the previous two waves, but it has also come in positive territory after remaining in the negative zone for three consecutive waves.

The improvement in the expected business confidence index (a subcomponent of the overall business confidence index) was more pronounced, as it touched its second-highest level since the start of this survey. Importantly, this optimism has also begun to reflect in planned investment activity in the country. Funding requests under the SBP’s Temporary Economic Refinance Facility (TERF) have risen sharply in recent weeks.

The scheme, which provides subsidized financing to businesses undertaking capex or BMR, has so far attracted 338 projects. These developments, along with optimism in the housing and construction sectors, could help accelerate the economy’s recovery process in FY21.

Given the fact that the TERF is geared towards supporting investment activities in the country, the uptick in its utilization is encouraging from a structural viewpoint as well.

Pakistan has historically been a consumption-oriented economy, which resulted in unsustainable growth spurts and investment rates not only remaining lower than most EMDEs, but also declining in absolute terms over the past few decades. In this regard, a strong response to incentive schemes such as TERF bodes well for the future economic trajectory, as capital formation activities would help enhance and potentially diversify the output capacity of Pakistan going forward.

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