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FY21 has started on strong footing as far as economic indicators are concerned. Of course, it would be premature to insist that the economy is out of the woods. However, leading metrics show that the economy is performing better than last year. The pandemic provided much-needed economic space – low commodity prices (especially oil) along with flurry of foreign flows from multilaterals have improved the external account situation.

The current account balance has improved from negative 1.2 percent of GDP in 1QFY20 to 0.8 percent in positive territory during 1QFY21. Out of the cumulative 2 percentage points improvement in the balance, 1.2 pp came from higher remittances, whereas 0.7 pp is due to lower imports. The cause of concern is that exports have stagnated. Fortunately, the government has bought itself some time to fix this mess.

The story of external account is substantiated by improved numbers on the fiscal side. Tax revenues met the targets for 1Q – though target was low. Growth is 5 percent year-on-year, which is much less than annual growth target of 24 percent. More is needed to be done. With low oil prices, this could be the year of growth in tax collection – as was the case in FY16. The SAPM on revenue is the same person who was at the helm of fiscal affairs in Dar’s time. Waqar Masood is an old school guy who knows the trick of trade to better manage the bureaucracy. Moreover, he has tons of experience in dealing with the IMF. Let’s see what he is going to bring to the table.

In terms of spending, PSDP expenditure has been limited in the first two months. The toll for Jul-Aug at Rs56 billion is even less than Rs67 billion spent in the first two months of last year. The fiscal deficit is relatively better in the first two months as according to sources, the Jul-Aug deficit stood at Rs440 billion (0.9 percent of GDP) as compared to Rs499 billion (1.2 percent of GDP) in the same period last year.

The good news is that there is primary surplus of Rs43 billion (0.1 percent of GDP) in Jul-Aug whereas there was deficit of Rs54 billion during the same period last year. Large Scale Manufacturing is in green too, with 5 percent growth in July as compared to negative 5.7 percent in July-2019. Given improved LSM and lower oil prices, the taxation number should have been higher. Some pieces of the puzzle still seem to be missing.

The high-powered indicators such as cement, auto, fertilizers and other sales are showing some growth to substantiate the economic recovery. Inflation is higher than market expectations but lower than last year. Interest rates have been reduced to half of last year’s levels. Private credit growth is in negative – worse than last year; but SBP’s concessionary financing schemes are receiving traction.

The overall story is better. The feel good factor has been created. This was shown by a good run in stock market. But lately, some anxiety is building up. There has been no significant shift in the fundamentals. At PSX, it could be healthy correction emanating from mutual funds selling as there might be some redemptions due to political noise. For those who missed the rally, it is time to take fresh positions, as the economic story seems to have turned a corner – at least for the next 12-24 months.