Pakistan’s economic growth rebounded to 3.9 percent in the fiscal year 2021 (ending 30 June 2021) and is expected to reach 4.0 percent in the fiscal year 2022 as business activity gradually resumes in the second year of the coronavirus disease (COVID-19) pandemic, says the Asian Development Bank (ADB).
According to the Asian Development Outlook (ADO) 2021 Update, ADB’s annual flagship economic publication, Pakistan’s economy is expected to continue recovering in FY2022, supported by stronger private investment, improving business activity, a steady vaccine rollout, and economic stimulus measures for FY2022. Yet, significant uncertainty clouds the economic outlook over the course of the pandemic in Pakistan and worldwide.
In Pakistan, GDP recovered more strongly in the fiscal year 2021 (FY2021, ended 30 June 2021) than forecast in ADO 2021, and growth in FY2022 is expected to be the same as projected in April supported by a vaccination rollout, economic stimulus measures, and structural reforms.
Pakistan’s current account deficit narrowed in FY2021, more than forecast in April, and is now projected to widen less in FY2022 than earlier expected.
The economy is expected to continue recovering in FY2022, with real GDP projected to rise by 4.0 percent. This growth forecast assumes recovery in private investment as consumer confidence and business activity improves amid the ongoing vaccination rollout and various economic stimulus measures announced in the budget for FY2022. It also assumes the resumption of structural reform later in the year in an ongoing program under the International Monetary Fund (IMF) Extended Fund Facility.
The economic outlook is clouded, however, by high uncertainty because it is closely tied to the course of the pandemic in Pakistan and globally.
On the supply side, the outlook for agriculture is encouraging in view of the government’s ambitious Agriculture Transformation Plan. The plan aims to achieve food security for a growing population by expanding land under cultivation, revamping extension services, boosting water-use efficiency, developing postharvest storage and food processing plants, augmenting bank credit, and introducing the Kissan Card as a digital wallet for the direct and swift transfer of subsidies for seed, pesticides, and fertilizer.
Growth in the industry is forecasted to improve in FY2022, driven by fiscal incentives announced in the FY2022 budget, a substantial rise in budgeted development spending, and strong private consumption underpinned by adequate agricultural harvests, strong remittance inflow, and a pickup in earnings as social restrictions are reduced and most economic activity resumes.
Also expected to buttress industry are the steady normalization of global merchandise trade, improved market sentiment, and stronger business and consumer confidence expected from the continuing rollout of COVID-19 vaccines and an accommodative monetary policy. Enhanced growth in agriculture and industry and an expected improvement in domestic demand are projected to boost growth in services, strengthening their contribution to growth in FY2022. On this outlook, this Update maintains the ADO 2021 projection for GDP growth at 4.0 percent in 2022.
Inflation is projected to slow to 7.5 percent in FY2022, unchanged from the forecast in ADO 2021, as food prices moderate with supply chain improvement and production increases facilitated by the government’s Agriculture Transformation Plan. Price rises for other goods are also expected to moderate, thanks to tax relief in the FY2022 budget. Inflationary pressures will likely come from ongoing economic recovery and rising global oil prices but should be tempered by expenditure reform and the government’s commitment not to borrow directly from the central bank.
The risk of inflation higher than forecast derives from any unusual increase in oil prices or from potential currency depreciation in the wake of any early winding down of the ongoing IMF program. The fiscal deficit is forecast to narrow to the equivalent of 6.9 percent of GDP in FY2022, which is still higher than the target set earlier under a medium-term fiscal consolidation program supported by the IMF.
Growth in revenue is projected to accelerate with the rapid pickup in domestic economic activity and higher imports. Further bolstering revenue growth is the introduction of new tax measures under the Finance Act, 2021, along with a renewed focus on streamlining tax exemptions and additional policy and administrative measures to broaden the tax base. Expenditure is also projected to rise in FY2022, as the government has budgeted substantial increases in subsidies and in social and development spending to protect the vulnerable and fortify growth and economic recovery.
Pakistan’s public debt outlook is sustainable in the medium term. With primary and fiscal deficits, high borrowing costs, and currency depreciation, public external debt reached $95.2 billion in FY2021. However, the government has been implementing a medium-term debt strategy for FY2020–FY2023.
The maturity structure of public debt has improved by reprofiling public debt into longer-term instruments. With strong economic growth prospects for FY2022 and beyond, public debt remains on a downward path over the medium term. As domestic demand picks up and international oil prices rise, the current account deficit is seen widening to the equivalent of 1.5 percent of GDP in FY2022, which is a smaller deficit than forecast in ADO 2021, in line with the FY2021 deficit being smaller than projected.
Export growth is expected to accelerate in FY2022, supported by a projected upturn in economic activity in Pakistan’s major trade partners. Exports will further benefit from continued initiatives to reduce the cost of doing business and especially from the government’s newly introduced export facilitation scheme, which allows the duty and tax-free acquisition of inputs: intermediate goods, plant, and machinery.
Imports are expected to rise in FY2022 in response to domestic economic recovery, higher international oil prices, and rationalization of custom and regulatory duties in the FY2022 budget. Remittances are likely to remain elevated, supported by the Roshan Digital Accounts initiative, and would continue to narrow the current account deficit.
Real GDP rebounded from pandemic-induced 0.5 percent contraction in FY2020 to grow by 3.9 percent in FY2021. The government implemented strong fiscal and monetary policy responses to the pandemic that included temporary fiscal stimulus, significant expansion of the social safety net, lower interest rates, subsidized credit, and relief on servicing bank loans. These measures lifted consumer and business confidence, as did a steady vaccine rollout, a gradual narrowing of mobility restrictions to small specific areas, and speedy resumption of most economic activity.
As of 13 September 2021, 21.6 million people – or 10.0 percent of the population – had been fully vaccinated, and 50.8 million people – or 23.6 percent of the population – had received one shot. The government aims to vaccinate 70 million people by the end of the current calendar year.
On the supply side, growth in agriculture slowed from 3.3 percent in FY2020 to 2.8 percent in FY2021, trimming the contribution of agriculture to GDP growth from 0.6 percentage points to 0.5 points. The slowdown reflected a cotton harvest significantly reduced by excessive rain, pest attacks, and a continued fall in cultivated areas.
Production of other major crops — notably wheat, rice, sugarcane, and maize — increased robustly thanks to a relief package for agriculture offering subsidies on seed, pesticides, fertilizer, and locally manufactured tractors, as well as bank credit and higher minimum procurement prices for wheat and sugarcane. Credit to agriculture increased by 14.1 percent year on year in the first 11 months in FY2021, and sales of farm tractors rose by 62.2 percent in the first 10 months. Growth in livestock, which contributes about 60 percent of agricultural output, accelerated from 2.1 percent in FY2020 to 3.1 percent in FY2021. Industry reversed 3.8 percent contraction in FY2020 to expand by 3.6 percent in FY2021. Robust manufacturing and construction flipped the sector’s contribution to GDP growth from –0.7 percentage points in FY2020 to 0.7 points in FY2021.
Despite new outbreaks of COVID-19 and the re-imposition of some mobility restrictions, business sentiment improved with the revival of economic activity, bolstered by fiscal incentives to key construction and export industries and subsidized credit to protect employment. The countrywide launch of a vaccination program in the second half of FY2021 further strengthened recovery in the industry.
Large-scale manufacturing, which accounts for about half of sector output, grew by 12.8 percent in the first 10 months in FY2021, reversing an 8.7 percent contraction in the same period a year earlier. This trend saw double-digit increases in textiles, food, automobiles, pharmaceuticals, chemicals, iron and steel products, and nonmetallic mineral products.
Growth in services also resumed with the normalization of most business activity following the removal of most restrictions on movement to contain COVID-19 and from buoyant growth in agriculture and industry. Reversing a 0.6 percent decline in FY2020, services expanded by 4.4 percent in FY2021, boosting the sector’s contribution to GDP growth from –0.3 percentage points to 2.7 points.
On the demand side, private consumption, which constitutes 81.6 percent of GDP, rebounded strongly in FY2021 to contribute 6.0 percentage points to GDP growth. The rebound reflected improved consumer confidence, a record increase in workers’ remittances, and cash transfers to the impoverished through the Ehsaas Emergency Cash Program.
However, growth in public consumption slowed as the government sought to consolidate its fiscal position by curtailing subsidies and gradually scaling back measures to mitigate the economic impact of COVID-19. Fixed investment contributed 0.7 percentage points to GDP growth as public investment increased, but private investment subtracted marginally from growth, subdued by uncertainty about the course of the pandemic nationally and globally.
Net exports reduced growth by 3.3 percentage points as imports grew considerably faster than exports in FY2021 on account of recovery in domestic economic activity and higher imports of essential foodstuffs to stabilize domestic prices. Average consumer inflation slowed from 10.7 percent in FY2020 to 8.9 percent, but rising food and energy prices kept it above the 6.5 percent target for the year set by the State Bank of Pakistan, the central bank.
Food price inflation remained elevated at 12.5 percent in urban areas and 13.2 percent in rural areas, primarily reflecting higher prices for nonperishable food items caused by supply chain disruption, increased farmer-support prices for wheat and sugarcane, and an extended wet monsoon. Rising international oil prices and a January 2021 increase in electricity tariffs boosted energy price inflation. However, inflation for other goods eased thanks to Pakistan rupee appreciation and the postponement in the wake of the pandemic of other planned hikes for electricity tariffs and domestic fuel prices.
Core inflation, excluding food and energy, fell from an average of 8.1 percent in FY2020 to 6.8 percent in FY2021. The central bank kept the policy rate unchanged at 7.00 percent after reducing it by a cumulative 625 basis points in the early days of the pandemic in March 2020. It aims to support economic recovery while keeping inflationary expectations under control. Further, the central bank has introduced a host of time-bound, targeted measures to help firms and households cope with pandemic-induced challenges by keeping businesses solvent, supporting export-oriented industries, encouraging investment, and sustaining financial services.
Responding to the improving outlook, the central bank has gradually trimmed several of these measures, ending in FY2021 a subsidized lending scheme to finance employee wages and salaries and thus prevent layoffs and, for bank borrowers, regulatory relief that facilitated loan deferment and restructuring. Private sector credit expanded by 6.1 percent in the first 11 months in FY2021 as demand recovered under accommodative monetary conditions.
Growth in private sector credit has featured increases in lending by 3.1 percent to manufacturers, 28.6 percent for consumer finance, 6.0 percent for construction, and 6.9 percent for electricity generation. Nevertheless, as a share of GDP, outstanding credit to the private sector declined from 15.1 percent at the end of May 2020 to 13.9 percent a year later. In FY2021, lower expenditure reined in the consolidated federal and provincial fiscal deficit to the equivalent of 7.1 percent of GDP, down from 8.1 percent of GDP a year earlier. The primary balance was a deficit of 1.4 percent of GDP. Revenue collection fell from 15.1 percent of GDP to 14.5 percent, primarily because of a large decline in non-tax receipts from an exceptionally high peak in the preceding year.
Tax revenue decreased marginally from 11.4 percent of GDP in FY2020 to 11.1 percent in FY2021 despite a higher petroleum levy and more effective federal and provincial tax collection. Expenditure decreased from 23.2 percent of GDP to 21.6 percent as spending on defense and development was significantly curtailed as fiscal space shrank and outlays for healthcare and social spending rose. As a share of GDP, interest payments declined marginally because of reduced foreign interest payments after Pakistan joined the Group of Twenty (G-20) Debt Service Suspension Initiative.
The fiscal deficit was financed largely through domestic borrowing, which provided 66 percent of the financing, 48.3 percent from banks, and 17.7 percent from nonbank sources. External borrowing financed the rest of the deficit. The current account deficit narrowed significantly from the equivalent of 1.7 percent of GDP in FY2020 to 0.6 percent in FY2021, the improvement driven by exceptional growth in remittances, a turnaround in exports, and a more robust primary income balance, with deferred interest repayments under the G-20 initiative. Supported by the government’s Roshan Digital Accounts initiative to help the Pakistani diaspora make online bank payments, transfers, and investments, remittances rose by 27 percent in FY2021, reaching an average of $2.4 billion per month.
By the end of FY2021, international reserves had reached $17.3 billion, improving import coverage to 3.4 months. In addition, the merchandise trade deficit widened from the equivalent of 8.0 percent of GDP a year earlier to 9.4 percent as imports surged to meet the rising demand for intermediate goods with the revival of economic activity and to counter supply shocks affecting key agricultural products, notably wheat, sugar, and cotton. This occurred despite exports reversing contraction by 7.1 percent with 13.7 percent expansion, mainly from supportive government policy and strong economic recovery in key export markets.
“Pakistan’s economy is on the path to recovery, supported by promising growth in the industry and services sectors,” said ADB Country Director for Pakistan, Yong Ye. “The continued rollout of the COVID-19 vaccination program, structural reforms, and the expansion of social protection programs are all key to ensuring inclusive and sustainable growth. Fiscal incentives and policies to boost export competitiveness, bolster the performance of the manufacturing sector, and augment private investment will continue to play an instrumental role in strengthening the economic outlook.”
Pakistan’s economic growth in FY2021 was supported by improved COVID-19 containment strategies through the second and third waves of infections and continued accommodative fiscal and monetary policies that accelerated the recovery across all sectors. Growth in industry, predominantly construction and small-scale manufacturing, and services are forecast to improve in FY2022. Agriculture is also expected to continue supporting GDP growth.
The inflation rates of Bhutan, Pakistan, and Sri Lanka this year are expected to rise on higher food prices. Inflation declined to 8.9 percent in FY2021. Food price inflation remained high due to supply chain disruptions, increased prices for wheat and sugarcane, and an extended wet monsoon. Rising international oil prices boosted energy price inflation. Yet, inflation for other goods eased thanks to the appreciation of the Pakistani rupee and a postponement of planned hikes for electricity tariffs and domestic fuel prices.
The State Bank of Pakistan, the central bank, maintained its policy rate at 7 percent in FY21 to support the economic recovery. Investment is expected to strengthen as global sentiment improves and the International Monetary Fund-supported stabilization program continues to progress.
Pakistan’s remittances also exceeded pre-pandemic levels by 42.9 percent, supported by strong inflows from Saudi Arabia and the United Arab Emirates.