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KARACHI: The State Bank of Pakistan (SBP) Wednesday projected that economic recovery is likely to gain further momentum and GDP growth will be in the range of 4-5 percent during this fiscal year (FY22). However, it said, deep-rooted structural impediments are need to be addressed for sustainable growth momentum.

The SBP in its annual report on the “State of Pakistan’s Economy” for the fiscal year 2020-21, projected up to 5 percent GDP growth in FY22 and said that addressing deep-rooted structural impediments is crucial for sustaining and improving the current growth momentum.

According to the SBP, these impediments include consistent decline in the yield of important crops especially cotton; insufficient export coverage of imports, low and declining productivity of labor, stagnant tax-to-GDP ratio; anemic investment-to-GDP ratio; and the rising fiscal burden of the power sector.

In addition, the consistently declining trend of investment in terms of GDP is one of the major factors behind the boom-bust cycle of Pakistan’s economic growth, where the economy is not able to sustain temporary consumption-led growth spurts in the absence of a concomitant increase in investment.

The report said that the dearth of investments has marred the productive capacity of the economy, increasing its vulnerability to shocks. This trend needs to be reversed by addressing key bottlenecks that have discouraged investment activity.

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In this context, tapping the potential of Special Economic Zones (SEZ) can play an important role. The SEZs are already gaining prominence in Pakistan, given the focus of the second phase of the CPEC on enhancing business-to-business cooperation, it added.

The report said that the economic recovery during FY21 is projected to gain further momentum in this fiscal year mainly due to significant increase in machinery and raw material imports, continued expansion in consumer financing, and strong uptrend in domestic sales as seen from high frequency demand indicators during the initial months of FY22.

The sustained pace of vaccine roll-out has created optimism about the normalization of economic activity, notwithstanding the risk of virus variants. The policy support provided after the Covid outbreak over FY20-21 has succeeded in reviving the real economic activity.

Specifically, the refinance schemes provided by the SBP are likely to have a cascading effect on growth through a revival in private investment. In addition, the accommodative monetary policy stance, the pro-growth measures outlined in the FY22 budget, the government’s focus on the revival of the construction industry. Both the supply and demand channels are expected to contribute to this higher growth outcome.

The FY22 budget stipulates a sharp expansion in development spending and the extension in the social safety envelope under BISP is expected to smoothen consumption patterns of the economically vulnerable segments. For businesses, tax and duty incentives for raw materials and capital goods, and the availability of power subsidies, are likely to boost economic activity and support private investment.

The agriculture sector is projected to further benefit from the support packages for the Kharif and Rabi crops, which would, in turn, have a positive effect on the services sector as well.

The SBP envisages the fiscal deficit within a range of 6.3 to 7.3 percent of GDP for FY22. This outcome would be driven by the continued check on non-priority current spending and an expansion in both tax and non-tax revenues.

Specifically, a strong upsurge in economic activity will have a corresponding positive implication for tax revenues. In addition, the Corporate Income Tax (CIT) reforms are likely to support FBR tax collection via the elimination of various income tax exemptions and normalization of tax rates.

The surge in imports is broad-based, partly reflecting the increasing pace of economic activity, a further increase in the global commodity prices, continued imports of agricultural commodities, automobiles, and many consumptions related items.

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On a positive note, this increase in imports also reflects increase in machinery, much of which is supported by TERF that should help to augment future productive capacity. In this scenario, the current account deficit is projected in the range of 2.0 to 3.0 percent of GDP during FY22.

Remittances are expected to remain upbeat amid the recovery in the global economy and a part higher import bill to be financed through workers’ remittances and export receipts.

Similarly, the pickup in international demand and a range of incentives announced by the government to lower the domestic cost of production, would likely bolster the export performance.

The services deficit is projected to expand, in line with some resumption in international air travel. Meanwhile, the outlook for financial flows is likely to remain conducive, on the back of the $ 3.8 billion already received from the global SDR allocations and from a Eurobond, along with further loan disbursements from multilateral and bilateral creditors, and inflows into the RDAs.

Some of the challenges like lower cotton output, mismatch between the country’s export earnings and import payments that require immediate policy attention. Consistently low yields of important crops, especially cotton, have constrained the agriculture sector’s growth outcome.

The long-term solution of these issues lies in a multipronged policy effort, incorporating significant upscaling of existing R&D setups in the public and private research institutes; addressing human and physical resource constraints; development of new varieties of pest and climate change-resistant seeds; and strict enforcement of seed market regulations.

Secondly, the mismatch between the country’s export earnings and import payments is a concern from the standpoint of the external sector’s stability.

Although export receipts have risen to an all-time high during FY21, with high value-added textile items, despite this, the exports’ coverage of imports is still under 60 percent, which is also below the average of some peer economies, including those in South Asia.

The concentration of the country’s exports in a few markets and products has limited its ability to achieve a high growth path. In this context, there is a need to introduce a long-term policy framework to address the aforementioned structural issues.

A perceptible improvement in the fiscal account requires generating sustained increase in tax revenues. Pakistan’s tax-to GDP ratio declined to around 11 percent in recent years, after increasingly slightly during FY16-18.

“A sustained increase in the tax base requires widening the scope of these efforts. Furthermore, for undertaking much-needed public investment and to provide targeted support to the economy, sustained primary surpluses are needed,” the report said.

Consistently large fiscal deficits have pushed the country’s public debt to high levels, whereas the consequent increase in debt servicing has constrained the government’s capacity for undertaking public investment and might also discourage private investment.

Copyright Business Recorder, 2021


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