ISLAMABAD: Pakistan’s economic growth rebounded to 3.9 percent in fiscal year 2021 (ending 30 June 2021) and is expected to reach four percent in fiscal year 2022 as business activity gradually resumes in the second year of the coronavirus disease (Covid-19) pandemic, says the Asian Development Bank (ADB).
According to the Asian Development Outlook (ADO) 2021 Update, the ADB’s annual flagship economic publication, Pakistan’s economy is expected to continue recovering in fiscal year 2022, supported by stronger private investment, improving business activity, a steady vaccine rollout, and economic stimulus measures.
Yet, significant uncertainty clouds the economic outlook over the course of the pandemic in Pakistan and worldwide, it added.
In Pakistan, the GDP recovered more strongly in fiscal year 2021 than forecast in the ADO 2021 and growth in fiscal year 2022 is expected to be the same as projected in April, supported by a vaccination rollout, economic stimulus measures, and structural reforms.
“It also assumes the resumption of structural reform later in the year in an ongoing program under the International Monetary Fund (IMF) Extended Fund Facility,” the Bank stated.
Inflation is projected to slow to 7.5 percent in fiscal year 2022, unchanged from the forecast in ADO 2021, as food prices moderate with supply chain improvement and production increases facilitated by the government’s agriculture transformation plan.
Price rises for other goods are expected to moderate, as well, thanks to tax relief in the fiscal year 2022 budget.
Inflationary pressures will likely come from ongoing economic recovery and rising global oil prices but should be tempered by expenditure reform and the government’s commitment not to borrow directly from the central bank.
Risk of inflation higher than forecast derives from any unusual increase in oil prices or from potential currency depreciation in the wake of any early winding down of the ongoing IMF programme.
The fiscal deficit is forecast to narrow to the equivalent of 6.9 percent of the GDP in fiscal year 2022, which is still higher than the target set earlier under a medium-term fiscal consolidation programme supported by the IMF.
Growth in revenue is projected to accelerate with the rapid pickup in domestic economic activity and higher imports.
Further bolstering revenue growth are the introduction of new tax measures under the Finance Act, 2021; a renewed focus on streamlining tax exemptions; and additional policy and administrative measures to broaden the tax base.
Expenditure is also projected to rise in fiscal year 2022, as the government has budgeted substantial increases in subsidies and in social and development spending to protect the vulnerable and fortify growth and economic recovery.
Pakistan’s public debt outlook is sustainable in the medium term.
With primary and fiscal deficits, high borrowing costs, and currency depreciation, public external debt reached $95.2 billion in fiscal year 2021.
However, the government has been implementing a medium-term debt strategy for fiscal year 2020–fiscal year 2023.
The maturity structure of public debt has improved by re-profiling public debt into longer-term instruments. With strong economic growth prospects for fiscal year 2022 and beyond, public debt remains on a downward path over the medium term.
As domestic demand picks up and international oil prices rise, the current account deficit is seen widening to the equivalent of 1.5 percent of GDP in fiscal year 2022, which is a smaller deficit than forecast in ADO 2021 in line with the fiscal year 2021 deficit being smaller than projected.
Export growth is expected to accelerate in fiscal year 2022, supported by a projected upturn in economic activity in Pakistan’s major trade partners.
Exports will further benefit from continued initiatives to reduce the cost of doing business and especially from the government’s newly introduced export facilitation scheme, which allows the duty- and tax-free acquisition of inputs: intermediate goods, plant, and machinery.
Imports are expected to rise in fiscal year 2022 in response to domestic economic recovery, higher international oil prices, and rationalization of custom and regulatory duties in the fiscal year 2022 budget.
Remittances are likely to remain elevated, supported by the Roshan Digital Accounts initiative, and will continue to narrow the current account deficit. On the supply side, the outlook for agriculture is encouraging in view of the government’s ambitious agriculture transformation plan.
The plan aims to achieve food security for a growing population by expanding land under cultivation, revamping extension services, boosting water-use efficiency, developing post harvest storage and food processing plants, augmenting bank credit, and introducing the Kissan Card as a digital wallet for the direct and swift transfer of subsidies for seed, pesticides, and fertiliser.
Growth in industry is forecast to improve in fiscal year 2022, driven by fiscal incentives announced in the budget, a substantial rise in budgeted development spending, and strong private consumption underpinned by adequate agricultural harvests, strong remittance inflow, and a pickup in earnings as social restrictions are reduced and most economic activity resumes. Also expected to buttress industry are the steady normalisation of global merchandise trade, improved market sentiment, and stronger business and consumer confidence expected from the continuing rollout of Covid-19 vaccines and an accommodative monetary policy.
Enhanced growth in agriculture and industry and an expected improvement in domestic demand are projected to boost growth in services, strengthening their contribution to growth in fiscal year 2022.
“Pakistan’s economy is on the path to recovery, supported by promising growth in the industry and services sectors,” said ADB Country Director for Pakistan Yong Ye.
“The continued rollout of the Covid-19 vaccination program, structural reforms, and the expansion of social protection programs are all key to ensuring inclusive and sustainable growth. Fiscal incentives and policies to boost export competitiveness, bolster the performance of the manufacturing sector, and augment private investment will continue to play an instrumental role in strengthening the economic outlook.”
Pakistan’s economic growth in fiscal year 2021 was supported by improved Covid-19 containment strategies through the second and third waves of infections and continued accommodative fiscal and monetary policies that accelerated the recovery across all sectors. Growth in industry, predominantly, construction and small-scale manufacturing, and services are forecast to improve in fiscal year 2022.
Agriculture is also expected to continue supporting GDP growth. The inflation rates of Bhutan, Pakistan, and Sri Lanka this year are expected to rise on higher food prices.
Inflation declined to 8.9 percent in fiscal year 2021 for Pakistan. Food price inflation remained high due to supply chain disruptions, increased prices for wheat and sugarcane, and an extended wet monsoon.
Rising international oil prices boosted energy price inflation.
Yet, inflation for other goods eased thanks to the appreciation of the Pakistani rupee and a postponement of planned hikes for electricity tariffs and domestic fuel prices.
The State Bank of Pakistan, the central bank, maintained its policy rate at seven percent (recently raised to 7.25pc) to support the economic recovery.
Investment is expected to strengthen as global sentiment improves and the International Monetary Fund (IMF)-supported stabilisation programme continues to progress.
Pakistan’s remittances also exceeded pre-pandemic levels, by 42.9 percent, supported by strong inflows from Saudi Arabia and the United Arab Emirates.
Copyright Business Recorder, 2021