Economy made encouraging recovery but structural vulnerabilities remain: SBP

• SBP issues "Third Quarterly Report on The State of Pakistan’s Economy".
• Report says widening of the merchandize deficit in external sector needs to be contained to a sustainable level.
  
• SBP warns twin burdens of debt servicing and a narrow revenue base are leaving less fiscal room for public investment.

KARACHI: The State Bank of Pakistan (SBP) on Monday noted that the economy made an “encouraging recovery” during the outgoing fiscal year (FY) 21 but warned that “certain structural vulnerabilities” continue to require the government’s attention.

The central bank issued the warning in its “Third Quarterly Report on The State of Pakistan’s Economy” for the fiscal year 2020-21 which was issued today.

“While the economy made an encouraging recovery during FY21, certain structural vulnerabilities continue to merit attention,” said the SBP.

To put fix those vulnerabilities the SBP pointed out that four areas required attention.

“First, in the agriculture sector, the secular decline in cotton production needs to be addressed,” said the SBP. It added that to fix this there was a need for the “timely availability of pest-resistant seed varieties”. It also said that further support from agriculture extension departments was required in particular to “promote the adoption of climate-smart farming practices that could enable better outcomes”.

“Second, in the external sector, the widening of the merchandize deficit needs to be contained to a sustainable level. Greater self-sufficiency in agriculture, through adoption of better farming and crop management practices, and maintenance of adequate stocks can reduce the need to import commodities (such as wheat, sugarcane and cotton) to bridge domestic shortfalls or counter temporary price pressures,” said the SBP.

The central bank said to resolve this there was a need to discourage the “import of luxury consumer items” and “greater diversification of exports, in terms of value-added items and destinations” needs to be promoted.

“Third, efforts are required to mitigate food inflation, triggered largely by supply-side issues in the management of agriculture commodities,” said the SBP. 

It added that this can be achieved if there is “better coordination among federal and provincial food departments, provision of reliable data, vigilant monitoring of stocks and food prices, and timely import of commodities”.

“Fourth, the twin burdens of debt servicing and a narrow revenue base are leaving less fiscal room for public investment,” said the SBP. In response, it urged that there was a need to accelerate “efforts to broaden the tax base, increase documentation in the economy, improve public financial management, restructure loss-making public sector enterprises, and reduce circular debt of the power sector”.

‘Economic recovery gathered further momentum in third quarter'

Despite the warning, the report acknowledged that there was growing evidence that the economic recovery gathered further momentum during the third quarter of FY21.

“The turnaround in the industrial sector, particularly large scale manufacturing (LSM), and the services sector, most notably in wholesale and retail trade, played a pivotal role. In the agriculture sector, record output of four out of five important crops – namely wheat, rice, maize and sugarcane – offset the decline in cotton production. Further growth in high frequency demand indicators, such as local cement dispatches, Petroleum Oil and Lubricants (POL) and car sales, consumer financing, sales of Fast Moving Consumer Goods (FMCG), and power generation, reflected the accelerating rebound in economic activity,” said the SBP.

The central bank said that against this backdrop it can forecast that the real GDP growth would be around 3.9% for FY21.

It noted that the favourable outcomes were supported by the pro-active response of policymakers to the COVID-19 pandemic.

“Even as the economy rebounds strongly, stability in key macroeconomic indicators on the fiscal and external side were an additional source of comfort, as the current account and primary balance both remained in surplus during Jul-Mar FY21,” said the SBP.

'Economic momentum to accelerate further during FY22'

The report concluded that the “economic momentum is expected to accelerate further during FY22”.

“The optimistic outlook is premised on the expanding vaccine roll-out and relatively unhindered continuation of economic activity despite COVID-19,” said the SBP. 

The report noted that the “Temporary Economic Refinance facility”, that provides long term lending for industrialisation, and “policy-led surge in construction and housing, and increased Public Sector Development Programe spending,” may act as key growth drivers in the new fiscal year.