Pakistan shows a broad economic recovery in fiscal year 2021: ADB

ISLAMABAD – The Asian Development Bank (ADB) on Tuesday has noted that Pakistan is projected to experience a broad economic recovery in fiscal year 2021 (which ends June 30 2021) as the economic sentiment improves with the expected subsiding of the coronavirus disease (COVID-19) pandemic and the resumption of structural reforms

Broad economic recovery is projected for FY2021, with GDP growth estimated to rebound to 2 per cent, albeit lower than forecast of 2.6 per cent in ADO 2020, the Asian Development Outlook (ADO) Update noted. Pakistan’s GDP growth remained at -0.4 percent in last fiscal year FY20.  This forecast assumes that the COVID-19 impact will subside by the end of 2020—the end of the second quarter of FY2021—allowing global conditions to normalize and economic sentiment to improve.

The ADO also assumes the resumption of structural reform under an ongoing IMF Extended Fund Facility program to address macroeconomic imbalances.

The government has proposed detailed economic stimulation measures in its FY2021 budget.

In addition to reallocating Rs7 billion from the Federal Public Sector Development Programme budget to COVID-19 response, the proposed budget raises allocations for initiatives that provide social protection to the disadvantaged. The flagship Ehsaas program will be scaled up from PRs190 billion in FY2020, or 2.3% of government expenditure, to PRs230 billion in FY2021, or 2.6%. With support from development partners, the government has been deploying the Benazir Income Support Programme to further counter the detrimental impacts of the COVID-19 pandemic.

On the supply side, agriculture is expected to continue to lend impetus to GDP growth. Crop damage from a severe locust infestation in FY2020 prompted several budgetary measures, including an agriculture emergency program worth PRs13.7 billion to support investment and expansion in agriculture and livestock rearing. Growth in industry is forecast to improve in FY2021, led predominantly by construction and small-scale manufacturing. In addition to the normalization of global economic conditions, improved market sentiment, and stronger business and consumer confidence expected with the easing of the COVID-19 pandemic by the end of the first half of FY2021, a relatively low policy rate should facilitate the financing of industrial initiatives. Spurred by improved growth in agriculture and industry, coupled with an expected improvement in domestic demand overall, services should also contribute to growth in FY2021

Inflation will ease somewhat with lower food and oil prices, but the current account deficit will widen as imports expand. Inflation is projected to slow to 7.5 percent in FY2021, lower than the April forecast in ADO 2020 driven by the expected economic recovery, but tempered by expenditure reform, and the government’s decision to stop borrowing from the central bank, which should help slow growth in the money supply to 14.2% in FY2021. An upside risk to the inflation forecast is global oil prices rising higher than currently projected in FY2021. A greater risk would be electricity tariff? increases currently under consideration to improve cost recovery in the industry and help bring down government subsidies.

The fiscal deficit is forecast to decline to the equivalent of 7.0% of GDP in FY2021. Revenue is projected to increase, reflecting ambitious revenue-mobilization targets following initiatives to withdraw tax exemptions, rationalize tax concessions, and broaden the tax base. This forecast depends on COVID-19 risks subsiding and rapid economic recovery to pre-COVID norms. Fiscal expenditure is projected to increase only slightly as the anticipated curtailment of some current expenditures such as subsidies somewhat compensates for higher development and social sector spending, which will continue to rise to support growth and economic recovery.

The current account deficit is anticipated to remain contained at the equivalent of 2.4% of GDP in FY2021, unchanged from the ADO 2020 forecast. Exports are expected to grow in FY2021 with the likely pickup in economic activity in Pakistan’s major trade partners, and as Pakistan’s exports become more competitive thanks to government measures to reduce business costs. Imports will rebound from a low base in FY2020 and, more importantly, in response to economic recovery in FY2021—and despite higher tariffs on imports of nonessential goods. Remittances should continue to cushion the current account deficit but will likely be lower than in FY2020 with the layoff of Pakistani workers overseas, in particular in the Persian Gulf, as economic activity remains soft globally.

Continued improvement is anticipated in the balance of payments and foreign reserve position in FY2021. This prospect owes to a flexible, market-determined exchange rate regime adopted in early 2019, which significantly improved the FY2020 external position; the anticipated containment of fiscal and current account deficits; debt service suspension granted by the Group of 20; and increasing foreign direct investment.

Pakistan’s public debt is expected to revert to a downward trajectory as the IMF stabilization program improves prospects for fiscal consolidation, and assuming rapid economic recovery from the COVID-19 shock. However, the economic outlook is subject to unusually potent downside risks in light of uncertainty about the duration and magnitude of the COVID-19 pandemic, the persistence of containment measures, and more than expected fall in remittances.

“Pakistan has achieved notable success in containing the dual health and economic challenge presented by COVID-19,” said ADB Country Director for Pakistan Xiaohong Yang. “As the curve flattens and businesses activity resumes, the economy is showing signs of resilience and recovery. The government’s rapid mobilization on 24 August of 1.2 trillion rupee relief package comprising emergency financial support to daily wage earners, cash transfers to low-income families, accelerated procurement of wheat, support for health and food supplies, and financial support for small and medium enterprises helped shield the poor and most vulnerable during the pandemic. ADB remains committed to supporting Pakistan through this difficult period and helping the country get back on the path to growth.”

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