The State Bank of Pakistan (SBP) has revised the GDP growth rate for the financial year 2020-21 to settle between the range of 2 percent to 3 percent.
In the quarterly reporter on the SBP’s economy for the fiscal year 2020-21, the SBP remained cautious for its forecast despite many independent economic experts projected the growth rate to be sustained at nearly 4 percent.
The recovery in economic activity is becoming more visible, with half of FY21 now passed. It is likely that real GDP growth will exceed the target of 2.1 percent, and the SBP has revised its real GDP forecast for FY21 upwards, to a range of 2 percent to 3 percent, from the earlier range of 1.5 percent to 2 percent provided in the First Quarterly Report of FY21, the report stated.
This revision mainly incorporates the continuation of recent trends in economic activities, including manufacturing, effective control of COVID’s second wave, the positive base effect from the COVID-caused slump in LSM in Q4 of FY20, and better prospects for wheat output.
However, as before, the downside risk to the forecast primarily stems from a resurgence in COVID-19 cases with the onset of the third wave, which might necessitate the re-imposition of mobility restrictions.
The main upside risk to this assessment would come from a substantial increase in international commodity prices. Deepening in any domestic supply-side challenges for food items or utility tariff hikes may also lead to higher inflation outturns.
Forecast of Macroeconomic Indicators
The current account deficit is now projected to be in the range of zero percent to one percent of GDP, against the earlier projected range of 0.5 percent to 1.5 percent shared in the First Quarterly Report of FY21.
As against SBP’s forecast, the current account may end up at surplus in the financial year for the first time in more than 17 years.
Based on the recent trend in forex receipts and payments, some factors have changed the projections for remittances and imports. The forecast for remittances has been increased by around 10 percent, based on two main factors.
First is the continued surge in inflows across all the major corridors, despite initial apprehensions. And second is the welcome turnaround in the trend of Pakistanis going abroad for work: work-related emigration from Pakistan rebounded in December 2020, and the trend has continued since then.
The projection of remittances was revised up to $26.5 billion to $27.5 for FY21 as against of earlier forecast of $21.5 billion.
Moreover, the services account is projected to improve further amid a deeper drop in travel services imports after the reimposition of mobility restrictions in some advanced economies in response to the third wave of COVID-19.
At the same time, the SBP’s projections for import payments have increased by roughly 9 percent from the projection provided in the First Quarterly Report of FY21.
The SBP’s full-year CPI inflation projection is unchanged, in the range of 7-9 percent. The main upside risk to this assessment would come from a substantial increase in international commodity prices. Deepening in any domestic supply-side challenges for food items or utility tariff hikes may also lead to higher inflation outturns.
The fiscal deficit will remain under pressure as it may settle from 6.5 percent to 7.5 percent of the GDP in FY21.
To sum up, the macroeconomic outlook for the current fiscal year has improved, after taking into account the developments during the first two-quarters of FY21.
Further impetus to the current economic momentum could come from a successful rollout of vaccines in the coming months. Business confidence has also been steadily improving, as indicated by the continuation of the upward trajectory in positive sentiments across four consecutive waves of the IBA-SBP survey till March 2021.
Finally, the resumption of the IMF program is expected to unlock additional external financing and support the country’s progress on the structural reform agenda.