Pakistan’s economy is on the trajectory of regaining its pre-COVID-19 levels during the first quarter of the financial year 2020-21, with the recovery in economic activities evident across the agriculture, industry, and services sectors declared a quarterly report by the State Bank of Pakistan (SBP).
The external and fiscal sector indicators also remained favorable, indicating that the emerging recovery was being achieved while keeping macroeconomic stability intact, stated the central bank’s report, titled “The State of Pakistan’s Economy.”
The report also notes that a timely and well-calibrated economic policy response to the COVID crisis from the government and the SBP helped prevent a severe fallout from the crisis and lay the foundations for economic recovery.
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Current Account in Surplus
Specifically, in the external sector, the current account posted a surplus, primarily due to robust workers’ remittances, rebound in exports, and lower services imports. Continued policy measures under the Pakistan Remittance Initiative and the promotion of formal and digital channels played a major role in driving remittances up.
The COVID-related international air travel restrictions further helped divert remittances from informal to formal channels while dampening the level of Pakistan’s services imports at the same time.
Exports and Imports
Import payments were relatively lower during the first quarter compared to the last year due to a sharp fall in global oil prices. Meanwhile, export receipts recovered from the lows in the last quarter of the last fiscal year but were somewhat lower compared to the Q1-FY20, with demand remaining soft among key trading partners.
Nonetheless, Pakistan’s export performance was relatively better compared to several other emerging markets, partly due to the early resumption of economic activities. As a result, exports regained their pre-COVID trajectory in September, supported by higher export receipts for textiles, cement, and pharmaceuticals.
On the whole, the current account surplus provided an additional boost to the country’s FX reserves and strengthened the exchange rate during the quarter.
Exchange Rate
The important shock-absorbing quality of the market-determined exchange rate was also evident during the quarter, as the Pakistani Rupee (PKR) adjusted flexibly in both directions in line with the underlying external sector fundamentals and flows.
It is worth highlighting that the national effort to mitigate the fallout of the pandemic, in the form of timely and calibrated policy interventions of the government and the SBP, provided a conducive environment for economic recovery to take root.
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Large Scale Manufacturing
In line with the growth in LSM, employment growth was observed as well, inter alia, in the July-August 2020 monthly surveys of industrial employment compiled by the statistical bureaus of Punjab and Sindh.
These encouraging developments were also reflected in the SBP’s Business Confidence Survey of August, with the business community’s sentiments turning positive for the first time since February 2020.
Within the industry, the report highlights notable growth in the cement and food processing sectors, as well as a revival in the automobile sector. Demand indicators such as cement dispatches, POL and car sales, power generation, consumer financing, and fast-moving consumer good (FMCG) sales showed a corresponding uptick.
Agriculture Sector
In agriculture, all major crops, except cotton, surpassed their production targets during the Kharif season. The favorable overall outcome was mainly attributed to an increase in the cultivated area of rice and sugarcane compared to the last year, and the government’s agriculture package, with its particular emphasis on fertilizer subsidy.
However, the cotton output was significantly lower than the target. The area dedicated to the crop was at its lowest since 1981-82, and exceptionally heavy monsoon rains (especially in some cotton-growing districts of Sindh) and pest attacks played a part in denting the cotton yield.
On the fiscal side, the report notes that the primary balance was brought back into surplus in Q1-FY21 following the COVID-related deterioration in the previous quarter. At 0.6 percent of GDP, the primary surplus was almost the same as in Q1-FY20.
Moreover, the government’s continuing commitment to fiscal discipline was reflected in zero fresh borrowings from the SBP. Meanwhile, the overall fiscal deficit was higher in Q1-FY21 on a year-on-year basis.
This could be traced to a decline in non-tax revenues compared to Q1-FY20, which ramped up the development spending for ongoing infrastructure projects and uplift of under-developed areas, and higher interest payments.
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Inflation
On the inflation front, the slight increase in headline inflation during Q1-FY21 compared to the preceding quarter was predominantly attributable to food inflation, with prices of non-perishable and perishable items driven up by supply-side factors.
Nonetheless, underlying inflationary pressures, as measured by the non-food-non-energy index, remained subdued on the back of well-anchored inflation expectations. The tapering of core inflation during the review period was also attributed to factors such as exchange rate appreciation, tax and tariff concessions of the Budget FY21, and relatively stable transportation costs.
Monetary and Fiscal Policies
The Monetary Policy Committee retained the policy rate at 7 percent during the quarter, maintaining that this interest rate, in conjunction with facilitative policies of the government and the SBP, was appropriate to support the emerging recovery while keeping inflation expectations well-anchored and safeguarding financial stability.
The fiscal and monetary policies in place represented an accommodative policy environment compared to the demand compression focus a year earlier amid high inflation and twin fiscal and current account deficits. This shift was instrumental in facilitating economic activity following the easing of domestic lockdowns to contain the first wave of COVID-19.
