State Bank of Pakistan (SBP) predicted the real GDP growth of the country cautiously, which may witness an increase in the range of 1.5 percent to 2.5 percent in FY21 amid uncertainties of COVID-19 and its impact on the economic activities.
However, the World Bank in its report titled “Global Economic Prospects (GEP) 2021” stated that Pakistan’s economic growth rate for the current fiscal year is forecast to remain subdued at 0.5 percent. Growth is projected to be held back by continued fiscal consolidation pressures and service sector weakness, it added.
The government has set a GDP growth target of 2.1pc for the current fiscal year.
The quarterly report, titled “The State of Pakistan’s Economy”, forecasts the various macroeconomic indicators along with an unexpected scenario that may destabilize the sustainable growth of economic activities in the country, which are heavily dependent on the severity of the COVID-19 pandemic in the country and its people.
As the economy recovers from the COVID-19 induced contraction, it is now faced with uncertainty related to the intensification of the second wave of the pandemic. This concern poses both upside and downside risks to the SBP’s macroeconomic projections.
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The real GDP growth is projected to be in the range of 1.5 to 2.5 percent in FY21. This is based on the current trends of economic activity. However, the downside risk to this projection includes the second wave of COVID-19, which has swept across many countries and, in Pakistan’s case, gained momentum in November 2020.
Supply-side shocks from uncertain weather conditions cannot be ruled out either. At the same time, there are also potential upsides. These include the development and distribution of an effective vaccine and its possible early availability.
The SBP revised its forecast of various macroeconomic indicators upwardly, in line with the improvement in the economy, which witnessed a sustainable period in the first quarter of FY21 and the subsequent two months.
The outlook for the external sector has improved since the previous set of projections published in SBP’s FY20 Annual Report. The current account deficit is now projected to be in the range of 0.5-1.5 percent of GDP in FY21 (earlier: 1.0 to 2.0 percent of GDP).
The revision is mainly due to an upward adjustment in workers’ remittances, which are now expected to be $24-25 billion in FY21 (earlier: $22-23 billion).
However, projections of workers’ remittances are subject to risk from the outlook for the oil-exporting GCC economies, whose fiscal balances might deteriorate further with the escalation in global COVIDinfections.
This may translate into a sizable reduction in their demand for foreign workers, leading to lower remittance inflows to Pakistan.
The outlook of exports and imports largely remains unchanged from their earlier assessment. The greater quantum of high value-added textiles and food commodities, especially rice, are expected to generate above-target growth in exports.
That said, the significant downside risk to this outlook stems from the resurgence of COVID-19 in major export destinations of Pakistan. It also has the potential to suppress demand. On the upside, the incentives given in the industrial support package since early November 2020 may help the textile sector exports perform better.
Similarly, imports are projected to surpass their annual target. The increase in food imports and domestic economic activity is mainly expected to drive import growth. That said, the increase in global COVID-19 infections and associated further decline in crude oil price could lower import payments.
The exports of the country are expected to increase in the range of $23 billion to $24 million. On the other hand, the import bill may balloon in the range of $43 billion to $44 billion in FY21.
As for the fiscal deficit, the latest projections suggest that it remains on track to meet the annual target of 7 percent of GDP by the end of FY21.
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Going forward, the fiscal situation would continue to depend on the domestic evolution of COVID-19. The upside risks mainly stem from (a) the health fallout and (b) the potential economic fall-out, in case of protracted or intensified lockdowns in the remainder of FY21.
By contrast, faster than an anticipated economic revival, which gives the government room to generate more revenues, either by rolling back certain tax concessions or imposing fresh levies, could contain the deficit further.
Moreover, the announced increase in the wheat support price and subsidies on fertilizer and pesticides may contribute to a better than expected out-turn of Rabi crops. The October 2020 wave of the SBP’s survey also reflects improved business sentiment, with the purchasing managers’ index (PMI) turning positive for the first time after eight waves.
Regarding the inflation outlook, the SBP projects average inflation in FY21 to remain in the 7 to 9 percent range.
The government’s handling of the current surge in COVID-19 infections includes keeping business activities running under standard operating procedures (SOPs), thereby supporting economic activity and employment.
The restrictions are focused more on reduced public gatherings, provisions for staff to work from home, and the temporary closure of educational institutes. Nonetheless, the overall growth outcome hinges on how the COVID-19 infections and the associated government response evolve.
