The GDP [Gross Domestic Product] growth of Pakistan is expected to stay within the range of 4-5 percent in the fiscal year (FY) 2021-22, according to the annual State of the Economy report of the State Bank of Pakistan (SBP) for 2020-21.
The report highlights that a broad-based recovery in real GDP growth was recorded. Led by the favorable supply and demand dynamics as well as a low base effect from the Covid-led contraction in FY20, large-scale manufacturing posted a 14.9 percent increase in FY21.
Though the growth in agriculture was slightly lower than in FY20, the production of wheat, rice and maize rose to historic levels. The cumulative increase in the production of these crops offset the decline in cotton production. The improvement in the commodity-producing sectors and a surge in imports led to a sharp recovery in wholesale and trade services in FY21.
The report also notes that the economic rebound was achieved without a worsening of macroeconomic imbalances, as the overall policy mix was still prudent. The current account deficit reduced substantially amid record-high workers’ remittances and export receipts and contributed to the US$ 5.2 billion increase in the SBP’s foreign exchange reserves during the year.
The country also retained access to sizable external financing, with inflows received from the International Monetary Fund (IMF) and other multilateral and bilateral creditors, the issuance of Eurobonds after a long hiatus and deposits and investments from non-resident Pakistanis via the Roshan Digital Accounts.
The report expects the economic recovery during FY21 to gain further momentum in FY22. The recovery is evident from the significant increase in machinery and raw material imports, continued expansion in consumer financing, and strong uptrend in domestic sales as seen from high-frequency demand indicators.
This year-on-year (YoY) improvement is likely to surface owing to the accommodative monetary policy stance, the pro-growth measures outlined in the FY22 budget, the government’s focus on revival of the construction industry under the “Naya Pakistan Housing Scheme”, and the mandatory housing finance targets by SBP.
The SBP expects the sharp expansion in development spending to give a push to construction and allied industries. Similarly, the extension in the social safety envelope under Benazir Income Support Program is expected to smoothen consumption patterns of the economically vulnerable segments.
The report says that for businesses, tax and duty incentives for raw materials and capital goods, and the availability of power subsidies, are likely to enhance economic activities and support private investments.
The agriculture sector is also projected to further benefit from the support packages for the Kharif and Rabi crops, which would, in turn, cast a positive effect on the services sector as well.
In the fiscal sector, the government plans to continue with the adjustment measures, which are projected to reduce the deficit to 6.3 percent of GDP, from 7.1 percent in FY21. The fiscal deficit, the report adds, could be within a range of 6.3 to 7.3 percent of GDP for FY22.
According to the report, the Corporate Income Tax (CIT) reforms announced in March 2021 are likely to support the Federal Board of Revenue (FBR) tax collection by eliminating various income tax exemptions and normalization of tax rates.
The sustained turnaround in sales of petroleum products is also expected to increase collection from the petroleum development levy.
Despite pressures emerging from the import side, SBP expects that the current account deficit to be within the range of 2.0 to 3.0 percent of GDP during FY22. Imports are expected to remain between $62.5 billion and $63.5 billion by the end of the financial year.
A part of the expansion in the import payments is projected to be financed through a consistent increase in the workers’ remittances and export receipts. The central bank expects remittances inflows in the range of $30.5 billion to $32.5 billion by the end of the current financial year. Similarly, exports receipts of the country will remain buoyant in the range of $26.5 billion to $27.5 billion.
The national consumer price index (CPI) inflation is expected to remain within a range of 7.0 to 9.0 percent. The report expects better commodity management practices, especially the build-up of reserves for wheat and sugar, to contain supply-side pressures from seeping into the inflation during FY22.
Source: Pro Pakistani