Home Articles How SBP views about Pakistan Economy in 2021-22 and oncoming budget

How SBP views about Pakistan Economy in 2021-22 and oncoming budget

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Muhammad Arif : Chairman Centre of Advisory Services for Islamic Banking and Finance (CAIF), Former Head of FSCD SBP, Former Head of Research ArifHabib Investments and Member IFSB Task Force for development of Islamic Money Market, Former Member of Access to Justice Fund Supreme Court of Pakistan

In a country, economy is managed through Fiscal policy and monetary policy. Fiscal policy is the balance sheet of the government that how they manage their revenue and how do they spend their expenditure along with making developments in different areas of the country.

On the other hand State Bank or any Central Bank keeps the country GDP moving forward by keeping the inflationlow. In our country SBP do it by announcement of its policy rate after each two months that keeps the market buying and selling rates within that range. Both government and State bank are independent by law but dependent on each other practically.

In line with market expectations, the State Bank of Pakistan (SBP) kept the interest rate unchanged at 7% for the next two months announced on 28th May 2021.Traditionally; the SBP revises its policy rate up or down, or keeps it unchanged in relation to the inflation reading and economic activities.

Low inflation mainly leads to a reduction in the policy rate for ramping up economic activities and vice versa. The rate is left unchanged at a higher level to tame inflation or on the lower side to support economic growth.

However, the world is quite different today where the pandemic is dominating decision-making in all walks of life and everything else has become less important.

In addition to this, Pakistan has invited the International Monetary Fund (IMF) to complete its second review of the country’s economy under the $6 billion loan program, which has been on hold since the Covid-19 outbreak in Pakistan in February 2020. The Fund has asked Islamabad to meet loan conditions including hike in power tariff, additional measures for increase in tax collection and making the central bank autonomous.

Inflation rose to 11.1 percent (y/y) in April 2021, propped up by the lingering impact of this February’s electricity tariff increase as well as a pick-up in month-on-month food prices, partly driven by the usual seasonality around Ramzan. As supply shocks dissipate thereafter, inflation is expected to gradually fall toward the 5-7 percent target range over the medium-term.

The SBP observed that given the Covid-related uncertainties, the cost of withdrawing monetary stimulus too soon exceeded that of withdrawing too late. Looking ahead, in the absence of unforeseen circumstances, theSBP expects monetary policy to remain accommodative in the near term, and any adjustments in the policy rate to be measured and gradual to achieve mildly positive real interest rates over time.

The latest National Income Accounts data confirm that the economy has rebounded strongly from last year’s severe Covid-shock, led by services and industry. The industrial sector is estimated to have grown 3.6 percent during FY21, driven by construction and large-scale manufacturing, especially the food, cement, textile and automobile sectors. The agriculture sector is estimated to have grown 2.8 percent, with the production of three important crops―wheat, rice and maize―rising to record highs and that of sugar cane to its second-highest ever level. Buoyed by the strong performance in commodity-producing sectors, services are estimated to have rebounded from last year’s contraction to register growth of 4.4 percent, led by wholesale and retail trade.

The SBP noted that, unlike several previous growth upturns in Pakistan, the current economic recovery has been achieved without compromising external stability. At $0.8 billion, the current account has remained in surplus through the first ten months of FY21 for the first time in 17 years. In recent months, imports have picked up with the economic recovery, rising international commodity prices, as well as one-off shipments of wheat and sugar to quell temporary domestic shortages. However, this is being largely offset by record remittances, which rose to all-time highs in April on both a monthly ($2.8 billion) and cumulative basis ($24.2 billion). In addition, exports have grown by almost 14 percent (y/y) so far this year, mainly due to high-value added textiles and favorable prices. In March, Pakistan successfully completed the combined 2nd-5th reviews of the IMF program and returned to international capital markets by raising $2.5 billion through an oversubscribed Eurobond, issued at yields below the initial price guidance. Together, these positive external developments kept the PKR broadly stable since the last MPC meeting around its pre-Covid level, and saw SBP’s foreign exchange reserves rise to almost $16 billion, a four-year high. Looking ahead, the current account deficit is expected to remain bounded, modulated by the flexible exchange rate regime, and external financing needs should be comfortably met, further bolstering foreign exchange buffers.

As envisaged, this year’s budget is arriving in June with target of Rs 8 trillion accompanied with Rs 8-10 trillion expenditure and revenue recovery by Rs 6 trillion would culminate in to Rs 2 trillion deficits. However fiscal consolidation has somewhat progressed well through the first three quarters of FY21. At 3.5 percent of GDP, the fiscal deficit is 0.6 percentage points lower than last year, despite higher interest payments and Covid-related expenses. Led by a rebound in sales tax and direct taxes, FBR tax collection (net of refunds) has increased by 14 percent. Restrictions on supplementary grants and austerity measures have contained non-interest current expenditures, which grew by 6.7 percent, only around half the rate of last year. As a result, the primary balance recorded a 1 percent of GDP surplus, its highest level through the first three quarters in 12 years

In view of SBP, the external sector continues to strengthen, with the current account in FY 21 Q1 recording the first quarterly surplus in more than five years. After remaining in positive territory for all four months of this fiscal year, the cumulative current account through October reached a surplus of $1.2 billion against a deficit of $1.4 billion in the same period last year. This turnaround was supported by an improvement in the trade balance and record remittances. Exports have recovered to their pre-COVID monthly level of around $2 billion in September and October, with the strongest recovery in textiles, rice, cement, chemicals, and pharmaceuticals. Remittances recorded strong growth of 26.5 percent (y/y) during July-October, primarily due to orderly exchange rate conditions, supportive policy measures taken by the government and SBP, travel restrictions, and increased use of formal channels. Meanwhile, subdued domestic demand and low global oil prices have kept imports in check.

Based on the performance to date, the outlook for the external sector has improved further and the current account deficit for FY21 is now projected to be below 2 percent of GDP.

Despite lower non-tax revenue, the primary balance posted a surplus of 0.6 percent of GDP in FY21 Q1, similar to the levels achieved during the same period last year. However, the higher overall budget deficit due to larger domestic interest payments should taper as the benefits of recent interest rate cuts filter through. PSDP-releases, which are an important stimulant of economic activity, recorded an increase of 12.8 percent (y/y) during the first four months of this year.

While private sector credit growth is moderate on a year-on-year basis, its month-on-month momentum is reverting to pre-Covid trends. With higher risk aversion on the part of commercial banks, the expansion in credit to the private sector has been supported by SBP’s temporary and targeted refinance schemes introduced in the aftermath of the Covid-19 shock

After falling sharply since January, headline inflation has remained close to 9 percent during the last two months, primarily driven by sharp increases in selected food items due to supply-side issues.

However apart from above positive views a look on data provided by SBP does not look as positive on reality basis. Real GDP growth is still in low condition. Fiscal deficit amounting Rs 2-3 trillion is on the scene that would further increase overall debt and interest payments. Total debt has gone above Rs 44, 801 billion and debt servicing has gone up to Rs 661 billion. Private sector credit off take has gone down by Rs 76.6 billion meaning business class has no confidence on the government. Revenue generation is not up the demand.

This all if happened would nullify all gains in the other areas and people would remain still on roads and without food in spite of 10% increase in the government employees’ salaries.

Data provided by SBP
Growth in % FY 2020 FY 2021
SBP prime rate (June 20) 7% 7%
Large scale Manufacturing 9.1 % 9.3
Agriculture 3.94% 2.8
Industry 32.5% 3.6
Services -0.6 4.4
Real GDP% (basic price) 3.94 3.9
Consumption -2.8 6.9
Fixed Capital formation -1.0 5.8
CPI Inflation YOY % 9.05 11.0
Investments 15.2 15.3
National savings 13.9 13.8
Current Account Balance $ in millions -444.9 778
Capital Account $ in million 285 204
SBP reserves $ in million 14,038 17,014
FDI $ in million 2,301 1,553
Remittances $ in million 2,724.95 7,147
Exports $ in million 19,704 20,993
Imports $ in Million 37,280 42,309
Total Revenue Rs in billions 4,690 4,993
Total Expenditure Rs in billion 6,376 6,645
Fiscal deficit (to be borrowed from the market) Rs in billion -1,686 -1,652
Debt Servicing or interest payment Rs in billion 1640 1928
Total Domestic Debt Rs in billion 23,283 25,552
Total External Debt $ in milions 113,013 116,309
Credit to private sector with stock of Rs 6.8 trillion (Rs in billion) 318.5 454.5
Advances/ Bank Deposits % 46.3 51.4

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