Going forward, during FY22, the economic momentum that manifested itself during FY21 is expected to strengthen further. The ongoing vaccine rollout, coupled with continued economic activity during the second wave of the virus and most of the third wave, offers some optimism. On the agricultural side, the impetus is likely to come from further improvement in production, with the government emphasizing the use of better seed varieties and modern technology. In particular, cotton production is expected to recover from the multi-year low recorded in FY21. The government’s Kharif and Rabi programs, which typically include subsidies on fertilizers and other inputs, are also expected to support the growth of the country. agricultural sector.

Further impetus to economic growth will likely come from the expected investments under TERF and the political impetus for construction activities. While the former saw a substantial increase in March 2021, the latter received support from the government’s Naya Pakistan Housing Scheme, coupled with the mark-up subsidy on home loans and regulatory pressure from the SBP for banks to increase the proportion of housing finance in their outstanding loans by the end of December 2021. In addition, the government has indicated its intention to increase spending on the PSDP, which would also be a major factor contributing to higher growth. These favorable trends in agriculture and industry would also affect the service sector. However, a major downside risk to the overall growth outlook for FY22 is the ongoing third wave and potentially additional waves of Covid-19, which could require the imposition of mobility restrictions and therefore disrupt momentum. economic process (figure 1.3).

Recent CPI results indicated a steady increase in year-on-year inflation in February, March and April 2021, but it can be noted that these increases are mainly coming from the supply side, with the output gap still being estimated negative. The current increase is concentrated on the prices of food products and utilities (electricity), while wage pressures are considered stable at this stage. In addition, better stewardship of commodities, including building up strategic staple food reserves, is likely to ease pressure on the food supply side. As a result, the second-round effects of supply-induced inflationary shocks are currently being mitigated and inflation expectations remain firmly anchored.

However, there are many upside risks to inflation expectations. First, the current upward trend in international commodity prices is widespread, with oil, food and metal prices all increasing significantly (Figure 1.4). Second, an upward adjustment in administered tariffs for utilities (electricity, gas and fuel) could further fuel inflation as well as inflation expectations. Third, wage pressures will need to be carefully monitored, especially in the context of any increases in minimum wages and public sector pay. Fourth, the removal of sales tax exemptions and other potential income-generating measures in the fiscal year 22 budget may also cause inflation to increase during the fiscal year.

In the tax sector, decent revenue growth has been seen so far in FY21, with collections through April 2021 above target. In addition, spending growth is lower than last year (FY20), mainly due to lower development spending and restraint in non-interest current spending. On this basis, the budget deficit of

Fiscal year 21 should represent 6.5 to 7.5% of GDP. However, an upside risk for this projection is higher payments due to circular debt settlements. For FY22, pending the budget, an improvement in the budget deficit is expected against a background of continuing current trends of revenue collection growth in FY22, as well as acceptance of the proposal to abolish corporate tax exemptions. Finally, the higher growth result in FY22 would further stimulate revenue collection, while PSDP spending is expected to increase.

In the external sector, while remaining limited, the current account deficit is expected to increase, mainly due to a new

widening trade deficit due to a likely increase in import payments. The increase in imports reflects rising oil prices, which are now expected to add to pressures from steadily increasing import volumes of energy products. Second, the continued upward trend in world non-energy prices, including food and metals, would also contribute to the increase in import payments (Figure 1.4). And third, imports of capital goods are expected to increase, in the wake of large TERF borrowing. Although the loan amounts under the scheme have been approved, the actual amount

imports are expected to materialize over the next few months.

On the other hand, the growth in export earnings is expected to come mainly from the continued strong momentum of high-value textile items (i.e. clothing and home textiles), as well as a rebound in prices. rice exports in a context of better crop forecasting (which allows exporters to offer more competitive prices). However, potential downside risks to export growth include the continued rise in international prices for textile inputs (including cotton yarn), which could impact the competitiveness of exporters; as well as the resumption of economic activity among the main competitors (notably India and Bangladesh) against the backdrop of vaccinations and a slowdown in Covid cases. Finally, workers’ remittances are expected to remain strong, as the main drivers (shifting to formal channels, incentives for banks and OTAs, etc.) will still be in place. In addition, progress on the IMF program would contribute to continued inflows of foreign currency from external sources, while promoting greater balance of payments stability.

(Extracts from the Third Quarterly Report of the Board of Directors, State Bank of Pakistan)

Copyright Business Recorder, 2021