ISLAMABAD: The Asian Development Bank (ADB), while projecting slower growth for agriculture sector of Pakistan, has forecast GDP growth rate at two percent and inflation at 8.7 percent for the fiscal year 2021.
The ADB in its latest report, “Asian Development Outlook 2021” stated that the GDP is forecast to grow by two percent in fiscal year 2021 as easing COVID-19 restrictions foster broad recovery.
Assuming successful vaccine rollout and the implementation of economic reform under a stabilisation programme with the International Monetary Fund (IMF), the GDP is expected to grow by four percent in fiscal year 2022 as consumption strengthens and investor confidence improves.
The economy contracted in fiscal 2020 as COVID-19 restrictions and supply-chain disruption shrank industry and services. The downturn was worsened by currency depreciation and fiscal tightening.
Growth is projected to rebound in the near term as restrictions ease.
Agriculture is projected to see slower growth, mainly because of a sharply lower cotton harvest following heavy rains, pest attacks, and continued contraction in cultivated area.
Other major crops, notably rice, sugarcane, and maize, look set to exceed output in fiscal year 2021, after the government subsidised agricultural inputs and bank credit.
The report noted that industry and services already show signs of recovery in fiscal year 2021 with fiscal incentives granted to key construction and export industries and subsidised credit offered to protect employment and stimulate growth.
Industry appears poised for robust growth led by manufacturing and construction. Large-scale manufacturing, which accounts for over half of the industry sector, reversed contraction by 3.2 percent in the first seven months of fiscal year 2020 to expand by 7.9 percent in the same period of 2021.
Support in fiscal year 2021 came from strong growth in businesses allied with construction and from the food-processing industry, amply supplied with substantial imports of unmilled wheat and by higher sugarcane output.
Services are expected to rebound as retail and trade pick up, and as schools and nonessential services reopen.
In any case, the government is fostering e-commerce to keep trade and commerce functioning, despite COVID-19 disruption.
Despite low interest rates and, early in the fiscal year, further electricity tariff adjustments and food supply interruptions, headline inflation is projected to slow to 8.7 percent in fiscal year 2021.
This, partly, reflects government subsidies for wheat and sugar imports, its careful monitoring of prices for essential commodities, and improved food supply later in the fiscal year.
In the first nine months of fiscal year 2021 (July to March), headline inflation was 8.4 percent.
The report further stated that the central bank has kept its policy rate at seven percent to support economic recovery.
This accommodative stance is made possible by lower inflation expectations and a stable exchange rate.
Growth in private sector credit picked up in the first half of fiscal year 2021, led mainly by construction, wholesale and retail trade, and consumer spending.
Growth reflected lower borrowing costs, subsidized credit schemes, and tax concessions for construction.
With fiscal consolidation expected to resume and the government likely to continue its policy of not borrowing from the central bank, inflation is projected to slide to 7.5 percent in fiscal year 2022. Investment is expected to strengthen as global sentiment improves and the IMF-supported stabilisation programme progresses.
The report further stated that foreign reserves continued to increase in the first 6 months of fiscal year 2021 to reach $14.9 billion as the current account turned around to a surplus and the Group of Twenty suspended debt service on its loans to Pakistan.
Assuming that stabilisation efforts are sustained and economic recovery is timely, public debt is expected to fall as a percentage of GDP.
However, the economic outlook is subject to downside risks, depending on persistent containment measures and success in achieving the vaccination target of 70 percent of the eligible population by the end of December 2021, it added.
The fiscal deficit in the first half of fiscal year 2021 equaled 2.5 percent of GDP, a slight increase of 0.1 percent from the same period last year.
The primary balance improved slightly to a surplus equal to 0.8 percent of GDP in the first six months of fiscal year 2021, reflecting lower current spending other than interest as the first wave of the pandemic abated and the second wave turned out to be mild.
Revenue fell slightly from 7.7 percent of GDP in the first half of fiscal year 2020 to 7.4 percent a year later, primarily, from a decline in non-tax revenue, which had been exceptionally high in the previous year.
Tax revenue remained strong with a doubling of the petroleum levy to the equivalent of 0.6 percent of GDP, but this could not offset the decline in nontax revenue.
Spending decreased from 10.1 percent of GDP in the first half of fiscal year 2021 to 9.9 percent as lower defense and development expenditure more than compensated for higher outlays for health care and social spending.
The current account deficit is expected to narrow slightly to the equivalent of 1.0 percent of GDP in fiscal year 2021 with support from robust remittances.
With the government having launched its Roshan Digital Accounts initiative in September 2020 to help Pakistanis abroad make online bank payments, transfers, and investments, remittances averaged $2.4 billion per month in July 2020–January 2021, producing a current account surplus in the period equal to 0.6 percent of GDP, the first surplus over a comparable period in more than a decade.
This surplus notwithstanding, a recent surge in imports is expected to produce a current account deficit in the whole of fiscal year 2021.
The trade deficit widened from 7.5 percent of GDP in the first seven months of fiscal year 2020 to 8.4 percent a year later as imports picked up, reflecting domestic economic recovery but also higher imports of essential food commodities to stabilise domestic prices. Exports of goods reversed growth by 2.2 percent with 3.8 percent contraction in the same period despite growth in some categories, notably knitwear and bedwear, leather, medical instruments, chemicals, and pharmaceuticals.
Exports of insurance, telecommunication, and computer services also increased. The current account deficit is projected to widen again in fiscal year 2022 to equal 2 percent of GDP on robust growth in imports as recovery strengthens and the surge in remittances tapers.
The report further noted that stronger small and medium-sized enterprises (SMEs) could collectively become an important pillar of the economy in Pakistan, able to absorb the significant numbers of youth entering the labor market.
During recovery from COVID-19, the priority should be to restore economic health by jumpstarting SMEs’ operations and improving their access to financial services.
The pandemic has highlighted that Pakistan needs to address the challenges of its private sector, in particular the prevalence of SMEs that operate informally.
An estimated 3.3 million SMEs in Pakistan engage some 40 million households in entrepreneurial activity. The SMEs operate across the economy, including agriculture and livestock, trade and manufacturing, and services.
The SMEs provide at least 30 percent of GDP, employ 80 percent of non-farm labor, and produce a significant percentage of exports.
However, their contribution to GDP is smaller than in other low-income countries, where it reaches up to 60 percent.
The low economic share of SMEs reflects their low value addition in a challenging macroeconomic environment with scarce credit, high inflation, an unstable currency, and inadequate infrastructure.
These constraints hamper SME efforts to take full advantage of Pakistan’s open economy and increasingly accessible world markets.
In general, SMEs lack a supportive public sector, skilled labor, trade capacity, and access to finance.
Only 21 percent of adults and seven percent of women have bank accounts, well below Pakistan’s regional peers.
Most lack proper documents such as audited accounts, and they avoid cumbersome tax and formalization regimes.
The SMEs have been particularly vulnerable to insolvency or downsizing under the pandemic and measures to contain it.
In terms of employment, smaller firms and informal workers have been the hardest hit, with SMEs unable to maintain payrolls when their operations were disrupted or completely closed.
Other challenges have been supply chain disruption and interrupted access to supplies for manufacturers and retailers, particularly under extended COVID-19 restrictions.
The ADB stated that with most SMEs operating informally, bottlenecks to formalization need to be identified toward simplifying licensing and registration processes.
To help informal SMEs move into the formal sector, licensing and registration processes should be simplified. Stakeholders should improve coordination to align the policies of the Federal Board of Revenue, the Securities and Exchange Commission of Pakistan, and the central bank with the needs of the private sector.
“It is vital for Pakistan to continue to combat the pandemic by rapidly deploying vaccines and continuing with reforms to support economic recovery, including strengthening social protection and supporting the private sector,” said ADB Acting Country Director for Pakistan F Cleo Kawawaki.
“Improving access to finance for small and medium-sized enterprises is essential to unlocking business opportunities and stimulating new jobs," said the acting country director.—TAHIR AMIN