Pakistan’s economy has sustained an upward growth momentum that had begun during the financial year 2020-21. It is on the right track to post six per cent gross domestic product in the next fiscal year starting in July, according to top government officials.
Pakistan Finance Minister Shaukat Tarin, who steers tough economic reforms, said Pakistan’s economy is expected to post ‘an inclusive and sustainable growth of up to five per cent during the financial year 2021-22, ending June 30.
“The sustainable growth of five to six per cent is the only way to reduce dependence on IMF and other multinational donors, and we are confident of achieving this target under the leadership of Prime Minister Imran Khan,” the Finance Minister told Khaleej Times during his recent visit to Dubai.
Pakistan Foreign Minister Shah Mahmood Qureshi, who recently visited Expo 2020 Dubai, also expressed similar views and said the country’s economy is moving forward and will deliver higher growth in coming years.
“Today, our economy is growing at the rate of 5.37 per cent despite the pandemic and slowdown in global economy. When we assumed powers in 2018, all economic indicators were negative, but now we are moving in the right direction,” Qureshi said while addressing the Pakistani community in Dubai.
Positive trend continues
The latest first-quarter report released by the State Bank of Pakistan indicated that both the supply and demand sides contributed to this momentum. Broad-based expansion in large-scale manufacturing (LSM) and improved Kharif crop outcomes reflected favourable supply-side dynamics. In contrast, strong sales of fast-moving consumer goods and cars, import volumes, energy consumption and consumer financing indicated buoyancy on the demand side.
“Higher economic activity contributed to improved tax revenues and a lower fiscal deficit. However, the substantial increase in global commodity prices contributed to a build-up in inflationary pressures and a widening current account deficit,” the report said.
The current account deficit widened
The latest data showed that Pakistan’s current account deficit widened to above $12 billion during July–February 2021-22 due to an extraordinary gap in national trade. The trade deficit widened by 82 per cent to $31.95 billion during the first eight months of the current fiscal year, compared with the debt of $17.53 billion in the corresponding months of the last fiscal year.
Pakistan’s import bill registered an increase of 55 per cent to $52.5 billion during the period under review, compared with $33.86 billion in the same period of the last fiscal year. The exports also grew by 26 per cent to $20.56 billion in the first eight months of the current fiscal year compared with $16.32 billion in the same period of the last fiscal year.
Foreign investment up
The Central Bank data also indicated that the total inflows of foreign investment into Pakistan have increased by 131 per cent to $1.85 billion during the first eight months of 2021-22. Total foreign direct investment (FDI) into Pakistan rose 6.1 per cent to $1.26 billion during the July–February 2021-22 compared to $1.19 billion in the corresponding period of the last fiscal year.
“The portfolio investment recorded a 24 per cent increase in outflows to $315 million during first eight months of the current fiscal year as compared with the outflow of $254 million in the corresponding period of the last fiscal year,” according to the Central Bank data.
Pakistan continued to sustain an upward trend in remittance inflows as non-resident workers remitted record money in recent months.
The Central Bank data indicated that workers’ remittances rose to $21 billion during July–February 2021-22 compared to $18.7 billion in the same period of the last fiscal year.
Pakistan is likely to receive a record $32 billion remittance inflows in fiscal 2021-22 as its over nine million overseas workers repose trust in the government policies. The country received record $29.4 billion remittances during 2020-21 compared to the $23 billion it received during 2019-20.
Foreign exchange reserves
Overall liquid foreign currency reserves held by the country, including net funds held by commercial banks, stood at $22.28 billion on March 11. The SBP, or the Central Bank, has $15.83 billion foreign exchange reserves which are enough for more than four months of the country’s imports. Commercial banks also held $6.45 billion forex reserves.
The foreign exchange reserves held by the Central Bank soared to an all-time high of $20.15 billion after Pakistan received a general allocation of Special Drawing Rights (SDRs) worth $2.75 billion from the International Monetary Fund (IMF) in August 24.
Policies paying dividends
The Central Bank’s first-quarter report notes that the continuation of the accommodative policy stance during the July-September 2021 period, SBP’s longstanding refinance schemes for exporting firms, and a growth-oriented budget for 2021-22 contributed to LSM growth rising to 5.1 per cent from 4.5 per cent last year. Industries that benefited directly from the financial support – automobiles and construction-allied sectors – also increased growth. In agriculture, preliminary estimates for rice, sugarcane and cotton pointed to encouraging output levels.
On the monetary side, the availability of affordable credit played a significant role in propping up industrial activity, especially in the wake of rising input costs. Commercial banks’ lending to private sector businesses rose by Rs177.4 billion during the first quarter of 2021-22, compared to a net retirement of Rs101.4 billion last year.
“Textiles, edible oil companies and oil refineries borrowed heavily for working capital, partly due to higher imported input costs. For export-oriented industries like textiles, the Export Finance Scheme and the Long-Term Financing Facility, along with continued disbursements under the Temporary Economic Refinance Facility, allowed them to borrow at concessional rates for working capital and fixed investment purposes, respectively,” according to the Central Bank.
The government and the SBP’s efforts to encourage housing finance – including via subsidised financing under the Mera Pakistan Mera Ghar scheme – began to yield desirable results as well, the report said.
“Banks approved Rs72 billion in financing under the scheme by end-September 2021, out of which Rs16.97 billion were disbursed. As a result, the outstanding stock of banks’ housing and construction finance had increased to Rs305 billion by quarter-end, from Rs166 billion a year earlier,” the SBP said.
Higher revenues, inflation
The report points out that this increased economic activity – coupled with rising imports, withdrawal of corporate income tax exemptions, increase in domestic prices, tax administration efforts and some budgetary measures — contributed to the sizable 38.3 per cent growth in FBR taxes during the first quarter of the financial year 2021-22.
The higher revenues allowed for a substantial rise in non-interest expenditures, stemming from increased development spending, purchase of Covid-19 vaccines, and power sector subsidies. As a result, the primary balance continued to remain in surplus. The fiscal position also materially benefited from reducing interest payments on both domestic and external debt. As a result, the fiscal deficit reduced to 0.8 per cent of GDP from one per cent last year,” the report said.
The SBP report notes that the significant upswing tested these macroeconomic gains in global commodity prices and shipping costs.
“Despite some deceleration from last year, CPI inflation remained at an elevated level of 8.6 per cent during the first quarter of 2021-22. The food group was the top contributor to headline inflation, amidst rising prices of edible oil, poultry, wheat and sugar,” the report said.
Meanwhile, the sharp rise in global oil prices contributed to higher energy inflation, despite the government’s decision to partially absorb the price hike by lowering taxes during July-September 2021.
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