Economic Outlook Remains Uncertain in Pakistan - SBP - Android

The COVID-19 pandemic not only ruined the economic gains of the country in the last financial year but it wreaked… Read More

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The COVID-19 pandemic not only ruined the economic gains of the country in the last financial year but it wreaked havoc on the business and economic environment of Pakistan registering a negative GDP growth for the first time in seven decades. These challenges continue to pose a serious threat to the economy with a high level of uncertainty.

In its report “The State of Pakistan’s Economy”, State Bank of Pakistan (SBP) commented that the economy continues to face uncertainty owing to the challenges posed by the pandemic on several economic fronts.

High levels of uncertainty are also reflected in recent SBP surveys. The Consumer Confidence Survey of May 2020 recorded a sharp deterioration in both consumer confidence and expected economic conditions following their improvement in March 2020. Similarly, the Business Confidence Survey of April 2020 registered its lowest historical level for overall business confidence.

Pakistan is not an outlier in this regard as the global economic uncertainty index also recorded its historic peak in April 2020, indicating a global manifestation of uncertainty.

The biggest concern is the fast spread of the disease, the report added.

Improvement in Economic Activities

Going forward, there are some prospects for gradual improvement in economic activity as the government is easing the lockdown while allowing many sectors to resume activities. This may result in a supply-side revival, though the agriculture sector outlook is at risk from locust attacks, which can unfavorably impact the ongoing kharif season’s output. Nonetheless, achieving the target of 2.1 percent growth in real GDP during FY21 will require a parallel improvement in underlying demand.

This requires effective utilization of the Public Sector Development Plan (PSDP) as per its allocation in the budget for FY21, while SBP schemes continue to support the liquidity needs of both businesses and consumers. High demand for these schemes is indicating the stress faced by economic agents due to COVID-19, whereas a growing number of approvals is increasing liquidity support that is going to be helpful in containing the pandemic related adverse fallout on supply and demand.

The consolidation achieved earlier in the year on the fiscal front was reversed as the COVID-19 shock started unfolding. Expenditures increased while revenues saw a sharp decline in their growth during Q4-FY20. Thus, fiscal deficit is estimated to touch 9.0 percent of GDP for FY20, compared to 4.0 percent recorded during July to March FY19-20.

As we step into FY21, roll out of the much-needed socioeconomic support package may continue to keep government expenditures high in the coming months. However, the gross revenue target of Rs. 6.57 trillion for FY21 is challenging as it entails significant growth over FY20 in an environment with low economic activity. As current expenditures, such as interest payments and pensions, are expected to consume a major share of the revenues, the government needs to have an efficient debt management policy while ensuring PSDP expenditures as per budget during FY21, the SBP’s report.

Inflation is expected to fall in the range of 7.0-9.0 percent during FY21 as the recent increase in petrol prices has tilted risks on the higher side of this range. Similarly, any new locust attacks of high intensity or COVID-19 related supply chain disruptions may hurt food security, resulting in higher inflation.

The outlook for the external sector is reasonably comforting, with the current account expected to remain bounded. While higher competition among competing exporters amid recovering global demand in the post-COVID-19 setting may restrict any quick recovery in exports, imports are expected to remain subdued due to low domestic demand and soft international oil prices in the coming months. While workers’ remittances may remain low as current disruptions and declining oil prices have strained economies of GCC countries, some cushion in services imports may come from restrictions on international travel.

Moreover, multilateral inflows may grow further and make up for some weakness in global capital inflows as more funds have been pledged by various international institutions to help governments cope with their pandemic related relief efforts.

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