2nd quarterly report unveiled: Economy picking up; three areas need vigilance: SBP

KARACHI: The State Bank of Pakistan (SBP) Thursday said Pakistan’s macroeconomic outlook for the current fiscal year has further improved supported by growing industrial activity, promising output of major Kharif crops and a pick-up in the services sector during the second quarter of this fiscal year (FY21).

Although the country’s economy is gradually improving, the SBP in its Second Quarterly Report on “The State of Pakistan’s Economy” for the fiscal year 2020-21, has pointed out three areas that merit continuing vigilance by policymakers. First is the burden of debt servicing as despite a relative improvement in revenue generation, the bulk of interest payments during the first half of FY21 were financed via the issuance of new debt.

Second, while national CPI inflation declined during the first half of FY21 on YoY basis and stayed within the SBP’s projection for the full year, the prices of food items remain vulnerable to supply-side pressures in recent months. Third, with the domestic economic activity recovering and global commodity prices rising, import pressures are resurfacing. Moreover, these pressures have been accentuated by the domestic supply-side challenges for major agricultural commodities cotton, sugar and wheat which necessitated their imports.

According to report, the macroeconomic outlook for the current fiscal year has improved and the recovery in economic activity is becoming more visible end of the second half. It is likely that real GDP growth will exceed the target of 2.1 percent, and the SBP has revised its real GDP forecast for FY21 upwards, to 2.0-3.0 percent, from the earlier range of 1.5-2.0 percent provided in the First Quarterly Report of FY21. This revision mainly incorporates the continuation of recent trends in economic activities, including manufacturing; effective control of Covid second wave; positive base effect from the Covid-caused slump in Large Scale Manufacturing (LSM) in fourth quarter of FY20 and better prospects for wheat output, it added.

Further impetus to the current economic momentum could come from a successful rollout of vaccines in the coming months. Business confidence has also been steadily improving, as indicated by the continuation of the upward trajectory in positive sentiments across four consecutive waves of the IBA-SBP survey till March 2021.

However, as before, the downside risk to the forecast primarily stems from resurgence in Covid19 cases with the onset of the third wave, which might necessitate the re-imposition of mobility restrictions.

The SBP’s full-year CPI inflation projection is unchanged, in the range of 7-9 percent. The main upside risk to this assessment would come from a substantial increase in international commodity prices. Deepening in any domestic supply-side challenges for food items or utility tariff hikes, may also lead to higher inflation outturns.

As per estimates, the current account deficit is now projected to be in the range of 0-1.0 percent of GDP, against the earlier projected range of 0.5-1.5 percent shared in the First Quarterly Report of FY21.

Based on the recent trend in forex receipts and payments, some factors have changed the projections for remittances and imports. The forecast for remittances has been increased by around 10 percent, based on two main factors. First is the continued surge in inflows across all the major corridors, despite initial apprehensions that inflows might subside as migrants return to Pakistan. And second is the welcome turnaround in the trend of Pakistanis going abroad for work: work-related emigration from Pakistan rebounded in December 2020, and the trend has continued since then.

The report projected that the services account to improve further, amid deeper drop in travel services imports after the re-imposition of mobility restrictions in some advanced economies in response to the third wave of Covid-19.

At the same time, the SBP’s projections for import payments have increased by roughly 9 percent from the projection provided in the First Quarterly Report of FY21. This upward revision in the forecast mostly reflects the momentum in economic activity, additional imports of wheat and sugar, and the increasing trend in global commodity prices, especially crude oil.

According to SBP, a positive development in the external sector is the growing interest of overseas Pakistanis in the newly launched Roshan Digital Accounts (RDA), an SBP initiative to provide a completely digital banking solution to non-resident Pakistanis. Within the first seven months of their launch, inflows into the RDAs have surpassed US$ 1.0 billion.

In the fiscal sector, the SBP’s projection for the budget deficit is unchanged, reflecting balanced risks. On the downside, the receipt of the Gas Infrastructure Development Cess (GIDC) payments after the apex court’s decision would improve the overall fiscal balance.

However, the report said that, the upside risk stems from some unbudgeted expenses that the government could likely incur in the remaining part of FY21. The largest of these is the government’s recent MoUs with multiple independent power producers (IPPs), which may entail a sizable upfront payment. While clearing the outstanding dues of IPPs is a step in the right direction, holistic and deep-rooted reforms are also needed in the country’s fragmented energy sector.

The SBP said that the resumption of the IMF programme is expected to unlock additional external financing and also support the country’s progress on the structural reform agenda.

Copyright Business Recorder, 2021