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Going forward, in FY22, the economic momentum that became evident during FY21 is expected to strengthen further. The ongoing rollout of vaccines, coupled with the continuation of economic activities during the virus’ second wave and most of the third wave, offers some optimism. On the agricultural side, the impetus is likely to come from a further improvement in output, with the government emphasizing the use of better seed varieties and modem technology. In particular, cotton production is expected to recover from the multi-year low recorded in FY21. The government’s Kharif and Rabi packages, which typically include subsidies on fertilizers and other inputs, are also anticipated to support growth in the agriculture sector.

Further impetus to economic growth is likely to come from expected investments under TERF and the policy-driven boost in construction activities. While the former has seen a substantial increase in March 2021, the latter has received support from the government’s Naya Pakistan Housing Scheme, coupled with the mark-up subsidy on house loans and the SBP’s regulatory push for banks to increase the proportion of housing finance in their outstanding credit by end-December 2021. Furthermore, the government has indicated its intention to increase PSDP spending, which would also be a major contributing factor to the higher growth outcome. These favorable trends across agriculture and industry would also spill over to the services sector. However, a major downside risk to the overall growth outlook for FY22 is the ongoing third and potentially additional waves of Covid-19, which might necessitate the imposition of mobility restrictions and therefore disrupt the ongoing economic momentum (Figure 1.3).

Recent CPI outturns have indicated a consistent YoY increase in inflation in February, March and April 2021, but it may be noted that these increases are primarily originating from the supply side, with the output gap still estimated to be negative. The current uptick is concentrated among food items and utility (electricity) prices, whereas wage pressures are judged to be stable at this point. Furthermore, better commodity management, including by building strategic reserves of staple food items, is likely to alleviate supply-side pressures from food items. As a result, second-round effects of the supply-driven shocks to inflation are currently muted and inflationary expectations continue to remain well-anchored.

However, there are multiple upside risks to the inflation expectations. First, the ongoing rising trend in international commodity prices is broad-based, with prices of oil, food and metals, all rising significantly (Figure 1.4). Second, upward adjustment in administered utility tariffs (electricity, gas, and fuel) could further feed into inflation as well as inflationary expectations. Third, wage pressures will need to be watched carefully, particularly in the context of any increases in the minimum wage and public sector pay. Fourth, the withdrawal of sales tax exemptions and other potential revenue generating measures in the FY22 budget may also lead to an increase in inflation during the fiscal year.

In the fiscal sector, a decent growth in revenues has been noted so far in FY21, with collections until April 2021 being higher than the target. Furthermore, the growth in expenditures is lower than last year (FY20), mainly due to lower development spending and restraint on non-interest current spending. On this basis, the fiscal deficit for

FY21 is expected to be 6.5-7.5 percent of GDP. However, an upside risk to this projection are higher payments on account of circular debt settlements. For FY22, while the budget is awaited, an improvement in the fiscal deficit is expected amid a continuation of the current growth trends in revenue collection into FY22, as well as the acceptance of the proposal to remove corporate tax exemptions. Lastly, the higher growth outcome in FY22 would further boost revenue collection, while PSDP spending is expected to increase.

In the external sector, while remaining bounded, the current account deficit is expected to rise, mainly due to a further

widening in the trade deficit on account of likely rise in import payments. The increase in imports reflects higher oil prices, which are now projected to add to the pressures coming from consistently growing import volumes of energy commodities. Second, the ongoing rising trend in global non-energy prices, including food and metals, would also contribute to the increase in import payments (Figure 1.4). And third, capital goods imports are projected to increase, in the wake of the significant borrowing under the TERF. While borrowing amounts under the scheme have been approved, the actual

imports are expected to materialize over the next few months.

On the other hand, the growth in export receipts is mainly projected to come from the continued strong momentum in high value textile items (that is, apparel and home textiles), as well as a rebound in rice exports amid better crop expectations (which would allow exporters to offer more competitive prices). However, potential downside risks to the export growth include continually rising international prices of textile inputs (including cotton yarn), which might impact exporters’ competitiveness; as well as the resumption in economic activity in key competitors (especially India and Bangladesh) amid vaccinations and a subsiding in Covid cases. Finally, workers’ remittances are projected to remain buoyant, as the main factors (switch to formal channels, incentives for banks and MTOs, etc.) will still be in place. In addition to this, progress on the IMF program would help the continuation of foreign exchange inflows from external sources, while promoting further stability in the balance of payments.

(Excerpts from Third Quarterly Report of the Board of Directors, State Bank of Pakistan)

Copyright Business Recorder, 2021

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