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Tough fiscal consolidation measures on the way

  • High growth accompanied by external and internal imbalances, as has been the case historically with Pakistan’s economy
Published June 10, 2022

ISLAMABAD: Finance Minister Miftah Ismail Thursday unveiled Economic Survey 2021-22 with a 5.97 percent GDP growth for the outgoing fiscal year against the projected target of 4.8 percent in the budget, but noted that the underlying macroeconomic imbalances and associated domestic and international risks have dampened celebrations.

The economy of Pakistan rebounded from the pandemic (0.94 percent contraction in fiscal year (2020) and continued to post a V-Shaped economic recovery which is higher than the 5.74 percent recorded last year (FY2021).

This high growth, however, is also accompanied by external and internal imbalances, as has been the case historically with Pakistan’s economy.

However, external circumstances also played a critical role this time. These circumstances have placed almost all economies of the world in shambles. A highly transmissible Omicron variety, changes in Afghanistan’s government after the withdrawal of US troops sparked and the Russian-Ukraine conflict started in February 2022, all of these have upended the global economic picture. Financial and commodity markets have felt shockwaves. Thus, energy and food prices have surged rapidly and threaten to remain further elevated.

Pakistan’s economy has shown a strong recovery after being depressed due to the pandemic which resulted in lockdown. For FY2022, real GDP (GVA at basic prices 2015-16) posted a growth of 5.97 per cent on account of 4.40 per cent growth in Agriculture, 7.19 per cent growth in the Industrial sector, and 6.19 per cent growth in the Services sector. This growth is slightly above the growth of 5.74 per cent recorded for FY2021.

Economic Survey to be unveiled today

For FY2022, GDP at current market prices stands at Rs66,950 billion showed a growth of 20.0 per cent over last year (Rs55,796 billion). In the dollar term, it remained at US$ 383 billion. Gross National Income (GNI) is also used for measuring and tracking a nation’s wealth which is calculated by adding Net Primary Income (NPI) to GDP (MP).

Regarding per capita income in terms of dollar, there was a rebound seen in FY2021 which continued in FY2022. In FY2022, per capita income was recorded at US$1,798 which reflects an improvement in prosperity due to the fact that economic growth per person improved.

The Gross Fixed Capital Formation (GFCF) for FY2022 was recorded at Rs8,992 billion against Rs7,217 billion in FY2021, thus, posting a growth of 24.6 per cent. The GFCF is comprised of private, public, and general governments. The GFCF in the private sector during FY2021 is estimated at Rs6,704 billion against Rs5,557 billion in FY2021, showing an increase of 20.6 per cent.

On the basis of data reported by PBS, GFCF in Public sector remained at Rs481 billion during FY2022 compared to Rs419 billion last year, registering an increase of 14.9 per cent. The overall provisional GFCF in General Government services for FY2022 has been recorded at Rs1,808 billion compared to Rs1,241 billion during FY2021, posting a growth of 45.6 per cent. This time, PBS has also provided industry-wise disaggregation of GFCF of General Government.

The data suggests that there was a 48, 34, and 25 percent increase in public administration and social security, education, and human health and social work, respectively.

Agriculture sector during FY2022, recorded a remarkable growth of 4.40 percent and surpassed the target of 3.5 per cent and last year’s growth of 3.48 per cent. This growth is mainly driven by high yields, attractive output prices and supportive government policies, better availability of certified seeds, pesticides, and agriculture credit.

The crops sector outperformed and posted a growth of 6.58 per cent during FY2022against 5.96 per cent last year. At the sub-sector level, important crops, other crops, and cotton ginning depicted a significant growth of 7.24 per cent, 5.44 per cent, and 9.19per cent, respectively, against last year’s growth of 5.83 per cent, 8.27 per cent, and -13.08per cent.

Livestock having a share of 61.89 per cent in agriculture and 14.04 per cent in GDP, recorded a growth of 3.26 per cent in 2021-22 compared to 2.38 per cent during the same period last year. The fishing sector having a share of 1.39 per cent in agriculture value addition and 0.32 per cent in GDP grew at 0.35 per cent compared to a growth of 0.73per cent in the same period last year.

The forestry sector having a share of 2.14 per cent in agriculture value addition and 0.49 per cent in GDP posted a positive growth of 6.13per cent against the negative growth of 0.45 per cent last year.

Water availability during Kharif 2021 was recorded at 65.1 million-acre feet (MAF) compared to 65.1 MAF of Kharif 2020. Rabi season 2021-22 stood at 27.4 MAF, showing a decrease of 12 per cent over Rabi 2020-21.

The domestic production of fertilizers during FY2022 (July-March) increased by 1.9per cent over the same period of last year. This increase in domestic production of fertilizer is mainly due to the running of two LNG-based plants, Fatima Fertilizer and Agritech Limited, from September 2021 to March 2022. Although the import of fertilizer decreased by 6.2 per cent, however, the total availability of fertilizer slightly increased by 0.5 per cent. There was a decrease in the total offtake of fertilizer nutrients by 3.6per cent.

During FY2022 (July-March), banks disbursed Rs958.3 billion which is 56.4 per cent of the overall annual target and 0.5 per cent higher than the disbursement of Rs953.7billion made during the same period last year. Further, the outstanding portfolio of agricultural loans has increased by Rs30.9 billion i.e., from Rs601.8 billion to Rs632.7billion at end of March 2022 as compared to the same period last year. In terms of outreach, the number of outstanding borrowers reached 3.2 million in March 2022.

The performance of Large-Scale Manufacturing (LSM) stood tremendous with 10.4per cent growth during July-March FY2022 as compared to growth of 4.2 per cent same period last year.

On a year-on-year (y-o-y) basis, LSM grew by 26.6 per cent in March FY2022 against 22.5per cent growth in the same month last year. However, on a month-on-month (m-o-m) basis LSM marked a growth of 8.2 per cent in March 2022 against 3.7 per cent in February 2022.Out of 22 subsectors, 17 posted growth during July-March FY2022.

The performance was broad-based on the back of strong growth of high weighted sectors such as Textile, Food, Wearing Apparel, Chemicals, Automobile, Tobacco, Iron & Steel Products along with Furniture, Wood Products, and Footballs.

Fiscal Development, currently, the fiscal policy at the global level is functioning in a highly volatile environment and Pakistan is no exception. The conflict between Russia and Ukraine has potentially serious economic consequences for Pakistan’s economy as it has exacerbated difficult policy choices for the country. Thus, controlling inflation, strengthening the economic recovery, supporting the vulnerable, and rebuilding fiscal buffers, all became significantly important.

The conflict and resultantly its impact on higher international commodities prices especially energy and food brought a plethora of challenges to Pakistan’s economy. To offset the impact of increasing oil prices, tax relief to the masses was provided in the shape of a reduction in the petroleum development levy (PDL) and the elimination of the sales tax on all POL products. These measures, combined with energy subsidies, have posed significant risks to fiscal sustainability in an already constrained fiscal environment.

Despite a significant rise in tax collection, higher current and development expenditures widened the fiscal deficit to 3.8 per cent of GDP during July-March FY2022 against 3.0per cent in the previous period. Similarly, the primary balance posted a deficit of Rs447.2 billion against a surplus of Rs451.8 billion. On the expenditure side, total spending witnessed a sharp increase of 27.0 per cent in July-March FY2022 against the contained growth of 4.2 per cent in the same period of last year. Higher development and non-mark-up current spending contributed to an increase in total expenditures during the year.

Total revenues increased by 17.7 per cent in July-March FY2022 against 6.5 per cent in the same period of last year. A significant increase in tax collection was a key factor in boosting revenue growth, which more than offset the decline in non-tax revenues during the review period. During the first nine months of the current fiscal year, total tax collection (federal & provincial) grew by 28.1 per cent, while non-tax revenues fell by 14.3 per cent. FBR outperformed the revenue target during the first ten months of FY2022.

During July-April, FY2022, FBR has been able to collect Rs4,855.8 billion (provisional) net tax revenues reflecting a growth of 28.5 per cent. However, tax relief measures have impacted revenue collection by approximately Rs73 billion during the month of April2022. The SBP had started to tighten its monetary policy stance from September 2021 after keeping the policy rate unchanged at 7 per cent in all the MPC meetings held in FY2021.

The monetary policy in Pakistan shifted direction in Q1-FY2022 in accordance with the changing economic outlook owing to a recovery in domestic demand, higher commodity prices, and persistent inflationary pressures. Consequently, the policy rate had increased by a cumulative 275 bps to 9.75 per cent during consecutive three monetary policy decisions, within a span of three months.

Accordingly, the MPC in an unscheduled meeting on April 7, 2022, raised the policy rate by 250 basis points. The MPC was of the view that this action would help to safeguard the external sector and price stability.

Staff-level pact with IMF expected by next week

During the monetary policy decision held on 23rd May 2022, the MPC decided to raise the policy rate by 150 basis points to 13.75 per cent. The decision was based on the outcome of provisional growth estimates for FY2022 more than the target, showing excess aggregate demand, elevated external sector pressure, and a higher inflation outlook due to domestic and international factors.

During the period 1st July-29th April FY2022, broad money (M2) has increased byRs1,457.2 billion (growth of 6.0 per cent) as compared with Rs1,632.7 billion (growth of 7.8 per cent) during the comparable period of last year.

Contained growth in M2mainly due to negative Net Foreign Assets (NFA) of the banking system, which has been contracted by Rs1,327.7 billion as compared to an expansion of Rs980.6 billion last year. This was contained due to pressure on the external front on account of high international commodity prices and expansion in domestic activities, transfers pressure on import bill, and current account deficit.

Conversely, the Net Domestic Assets (NDA) of the banking sector observed an expansion of Rs2,784.8 billion against Rs652.1 billion last year. The expansion in NDA on account of significant expansion in private sector credit increased lending to Public Sector Enterprises (PSEs) and lending to government commodity procurement agencies.

Private sector credit witnessed an unprecedented expansion of Rs1,312.9 billion during the period 1st July-29th April, FY2022 compared to Rs454.4 billion during the same period last year, posting significant growth of 189 per cent in flow terms.

The world stock indices started on a positive note during the current fiscal year. However, due to the geopolitical tensions especially the Russia-Ukraine war plummeted the global indices in the month of February and March 2022.

Pakistan stock market’s performance has posted a boom-and-bust situation during the first nine months of the current fiscal year. During July-March FY2022, the benchmark KSE-100 index declined from 47,356 points to 44,929 points. During the period under review, the index closed at its highest level of 48,112 points on August 23, 2021. As of March 31, 2022, the total number of listed companies on the Pakistan Stock Exchange (PSX) stood at 532, with a total market capitalization of Rs7,583 billion.

The major development of this year in the equity market is the issuance of Initial Public Offerings (IPOs). During July-March FY2022, five companies issued shares through a public offering on the main board of PSX (Citi Pharma limited, Pakistan Aluminium Beverages Cans Limited, Airlink Communications Limited, Octopus Digital Limited, and Adamjee Life Assurance Company Limited), while two companies were listed on the newly introduced Growth Enterprise Market (GEM) Board (Pak Agro Packaging Limited and Universal Network Systems Limited).

During July-March FY2022, corporations raised Rs121.5 billion by issuing 32 debt securities, while 102 previous corporate debt securities worth Rs749.82 billion remain outstanding. Moreover, during July-March FY2022, 2.31 million lots of various commodities futures contracts including gold, crude oil, and US equity indices worth Rs2.65 trillion were traded on Pakistan Mercantile Exchange Limited.

The CPI inflation for the period July-May FY2022 recorded at 11.3 per cent as against 8.8per cent during the same period last year. The other inflationary indicators like Sensitive Price Indicator (SPI) recorded at 16.7 per cent as against 13.5 per cent last year.

Wholesale Price Index (WPI) recorded at 23.6 per cent in July-May FY2022 compared to 8.4 per cent same period last year. The pressures on headline inflation can fairly be attributed to adjustment in prices of electricity and gas, a significant increase in the non-perishable food prices, exchange rate depreciation along with a rapid increase in global fuel and commodity prices.

During July-April FY2022, goods exports grew by 27.6 per cent to US$ 26.8 billion, whereas services exports grew by 18.2 per cent to US$ 5.8 billion. Around two-thirds of the increase came from the textile sector, especially from the high value-added segment.

Pakistan’s textile exporters capitalized on the policy support available-including the Export Facilitation Scheme 2021, SBP’s concessionary refinances schemes for working capital and fixed investment, and the regionally competitive energy tariffs and managed to ship higher volumes to key destinations (such as the US, UK, and EU).

Higher cotton prices also helped increase the export unit prices of both low and high-value-added textile products. Apart from textiles, rice exports also rebounded during July-April fiscal year 2022, mainly on the back of the non-basmati variety.

Despite the encouraging export performance, the country’s imports have also risen significantly. The broad-based surge in global commodity prices, Covid-19 vaccine imports, and demand-side pressures, all contributed to the rising imports. Resultantly, the trade deficit grew by 49.6 per cent to US$ 32.9 billion which is historically high.

Remittances, which always supported in easing out the pressure of trade deficit of both goods and services, recorded at US$ 26.1 billion during July-April FY2022 and posted a Pakistan Economic Survey 2021-22 x growth of 7.6 per cent.

This ever-highest level of workers’ remittances still not sufficient to offset the trade deficit. Thus, the current account deficit was recorded at US$ 13.8 billion during the period under discussion. Further, the low performance of the Financial Account during the period not only resulted in the depletion of foreign reserves but also brought the exchange rate under pressure.

The interbank PKR-USD exchange rate depreciated 15.1 per cent during July-April FY2022. The SBP’s FX reserves also came under pressure from Q2 onwards, dropping from US$5.9 billion during the review period to US$ 10.5 billion by end April 2022.

Total public debt was recorded at Rs44,366 billion at end March 2022. Domestic debt was recorded at Rs28,076 billion, while external public debt was recorded at Rs16,290 billion or US$ 88.8 billion at end March 2022.

The public debt portfolio witnessed various positive developments during the first nine months of the ongoing fiscal year (July-March FY2022), some of them are highlighted as follows: Within domestic debt, the government relied entirely on long-term domestic debt securities for the financing of its fiscal deficit and repayment of debt maturities. In fact, the government retired/repaid a portion of treasury bills amounting to Rs1.5 trillion which led to a reduction of short-term maturities in-line with the government’s commitment to reduce its Gross Financing Needs.

The government repaid Rs569 billion against SBP debt. Cumulative debt retirement against SBP debt stood at Rs2.3 trillion from July 2019 to March 2022. The government successfully issued Shariah-compliant Sukuk instruments amounting to around Rs1.1 trillion, in line with the target specified in the Medium Term Debt Management Strategy of Pakistan (2019/20 - 2022/23), to increase the share of Shariah-compliant securities within domestic debt stock; Debt from multilateral and bilateral sources cumulatively constituted around 79per cent of the external public debt portfolio at end-March 2022.

Within external debt, inflows from multilateral and bilateral development partners remained major sources of funding. In addition, Pakistan successfully raised US$ 1billion in July 2021 through multi-tranche tap issuance of 5, 10 and 30-yearEurobonds.

These bonds were issued at a premium. In January 2022, the Government of Pakistan successfully raised US$ 1 billion through the issuance of International Sukuk under the ‘Trust Certificate Issuance Programme. This was the first time that the Government has issued International Sukuk with 7 Year maturity and at a market-clearing price i.e., zero issuance premium.

The transaction was a success as healthy participation was witnessed from Middle Eastern and European investors and the books were oversubscribed 2.7 times. The government repaid US$ 1 billion against maturing International Sukuks in October 2021. The government utilized IMF allocated SDR equivalent to Rs 475 billion to support its budgetary operations.

Total interest servicing was recorded at Rs2,118 billion during the first nine months of the current fiscal year against its annual budgeted estimate of Rs3,060 billion. Out of this total, domestic interest payments were Rs1,897 billion and constituted around 90 per cent of total interest servicing during the first nine months of the current fiscal, which is mainly attributable to a higher volume of domestic debt in the total public debt portfolio.

However, according to Labour Force Survey 2020-21, literacy rate trends show 62.8 per cent in 2020-21 (as compared to 62.4 per cent in 2018-19), more in males (from 73.0 per cent to 73.4 per cent) than females (from 51.5 per cent to 51.9 per cent).

In 2022, the government also expanded health infrastructure by increasing the number of hospitals, Rural Health Units (RHUs), Basic Health Units (BHUs), doctors, dentists, and dispensaries to meet the growing health services demand. However, COVID-19 had disrupted the major strides in the health sector as the resources were shifted to contain the spread of the fourth and fifth waves of the pandemic.

Pakistan is the 5th most populous country in the world.

According to the National Institute of Population Studies (NIPS), the estimated population of Pakistan is 224.78 million in 2021 of which 82.83 million reside in urban areas whereas 141.96 million live in rural areas and the population density is 282 per km. Pakistan has a large labour force that stands among the top 10 largest labour forces in the world.

According to the latest Labour Force Survey FY2021, the labour force increased from 65.5 million in FY2018 to 71.76 million in FY2021 and the number of employed persons increased from 61.71 million to 67.25 million during the same period. The unemployment rate decreased from 6.9 per cent in FY2019 to 6.3 per cent in FY2021. Overall employment to population ratio is 42.1 per cent and this ratio is higher in male (64.1 per cent) as compared to female (19.4 per cent) in FY2021.

According to LFS FY2021, the share of employment in the agriculture sector decreased from 39.2 per cent in FY2019 to 37.4 per cent in FY2021. The share of employment in the construction sector has increased from 8.0 per cent in FY2019 to 9.5 per cent in FY2021. This increase shows that job opportunities are being created in the country. The wholesale and retail trade sector has shown 14.4 per cent employment in FY2021.

CPEC is a flagship and most actively implemented project of the Belt & Road Initiative (BRI) where Pakistan and China have successfully launched 56 projects on the ground. Out of these projects, 26 projects worth approximately US$17 billion have been completed so far and 30 projects worth US$8.5 billion are under construction.

The latest available data indicates that the import bill of oil increased to US$ 17.03 billion during July-April FY2022 compared to US$8.69 billion during the same period last year, showing increase of 95 per cent. Crude oil imports rose by 75.34 per cent in value and 1.4 per cent in quantity. Similarly, liquefied natural gas witnessed an increase of 82.90 per cent in value while liquefied petroleum gas imports also jumped by 39.86 per cent during July-April FY2022. During July-February FY2022, 75.64 per cent of gas is domestically produced while 24.36 per cent of gas is being imported. Coal is also used for electricity generation in Pakistan.

Currently, the overall electricity generation from coal has reached 5280 MW. Thar coal is contributing 1,320 MW, while imported coal’s contribution to electricity generation is 3,960 MW which is around 75 per cent of the total electricity generation from coal in the country.

Currently, the Hydro installed capacity is 10,251 MW which is around 25 per cent of the total installed capacity. Pakistan has also wind corridors. The contribution of Wind to the total installed capacity is 4.8 per cent and currently stood at 1,985 MW. The potential for solar power in Pakistan is also high. The installed capacity of solar is 600 MW which is around 1.4 per cent of the total installed capacity. Pakistan is also producing energy from nuclear technology whose contribution is increasing gradually.

BISP is currently disbursing payments to around 5.7 million regular beneficiaries under its Ehsaas Kafaalat Programme. During FY2022, the number of regular beneficiaries has been enhanced to 8.0 million. BISP in coordination with Finance Division and World Bank has developed an institutional mechanism as well as a proposal to increase the cash assistance under Kafaalat @ Rs166.33/- per month or Rs500/- per quarter w.e.f 1st January 2022 has been approved by the Federal Cabinet.

The second phase of the Ehsaas Emergency Cash Programme (ECAP-II) has been launched in June 2021. As of 30-03-2022, an amount of Rs 30.18 billion has been disbursed to 2.50 million additional beneficiaries (other than UCT beneficiaries) Overview of the Economy xv @ Rs12,000/- per beneficiaries to ever-married women of the eligible families having valid CNIC.

Under Ehsaas Taleemi Wazaif Programme, 6.52 million children have been enrolled and 25 billion have been paid so far. During FY2022, 3.22 million children have been enrolled and Rs5.0 billion have been disbursed. Ehsaas undergraduate scholarship programme, 1,38,133 scholarships were awarded to deserving students, and Rs13.2 billion were disbursed during FY2020 and FY2021.

For FY2022, Rs9.5 billion was allocated, 122,000 applications have been received and its screening process will soon begin. 50 Ehsaas Nashonuma Centres across 14 districts are being established countrywide at the district and Tehsil level to provide health services and conditional cash transfers under two years old; Rs1500/- for a boy child and mother, and Rs2000/- for a girl child mainly to prevent children from stunting growth issue. So far, 99,190 beneficiaries have been enrolled and Rs310.81 million has been disbursed till March FY2022.

Pakistan Poverty Alleviation Fund (PPAF) also helps in micro-credit, water, health, education, and livelihood. Since its inception in April 2000 till March 2022, PPAF has disbursed approximately Rs237.56 billion to its Partner Organizations (POs) in 147 districts across the country. A total of 8.4 million microcredit loans have been disbursed with 60 per cent loans to women and 80 per cent financing extended to rural areas.

Copyright Business Recorder, 2022


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