Pakistan’s economic outlook improves, but challenges remian: IIF – Gulf News

Further fiscal consolidation and structural reforms needed to achieve higher growth
Dubai: Pakistan’s economy has remained largely resilient to COVID-19 with policy response to the pandemic has limiting economic contraction and the country is poised for a 4 per cent GDP growth in the financial year 2021- 22, according to the Institute of International Finance (IIF).
“The authorities have deployed a comprehensive set of policy responses that have helped to limit the contraction in real GDP to 0.5 per cent in FY 2019/20. The crisis-mitigating measures included emergency health spending, a food security programme, temporary tax deferrals, subsidized loans to house-holds, and deferrals of loan payments,” said Garbis Iradian, Chief Economist, MENA, IIF.
According to the IIF’s estimates GDP growth will remain around 4 per cent 2021-22 supported by an accommodative monetary policy and a significant increase in public investment. Preliminary official estimates show a strong recovery in financial year 2021 (ending in June), with growth of 3.9 per cent, driven by the recovery in manufacturing and services.
Monetary policy remains accommodative as inflationary pressures have eased in recent months. The policy rate remained unchanged at 7 per cent from July 2020 to August 2021 and supported the recovery. Urban core inflation remained broadly stable at 6.9 per cent in July 2021 (yoy) as compared with headline inflation of 8.7 per cent, which was driven by the upward adjustment in electricity tariffs in the context of higher global oil prices
The State Bank of Pakistan (SBP) recently noted that the recent price pressures were “largely supply-driven and transient” and expects average CPI inflation to decline to slightly below 8 per cent in FY 2021/22 as compared with 10.7 per cent in FY 2019/20.
The external position has strengthened supported by the continued surge in worker’s remittances. The deterioration in the trade deficit, on the back of the sharp increase in imports, has more than offset by the continued surge in workers’ remittances.
Remittances increased by 29 per cent in FY 2020-21 driven by both domestic and international factors. Domestically, the authorities reduced the threshold for eligible transactions from $200 to $100 under the Reimbursement of Telegraphic Transfer (TT) Charges Scheme, promoted usage of formal and digital channels, and restricted cross border travel in the wake of COVID-19.
Internationally, fiscal stimulus in developed and emerging economies enabled Pakistanis living abroad to send more money home. Saudi Arabia, the UAE, USA, and the UK are the main source of remittance inflows.
“The current account deficit narrowed from by one percent-age points of GDP to 0.7 per cent of GDP in fiscal year 2020/21. Net capital inflows were again well above the current account deficit, leading to a substantial increase in official reserves to the equivalent of 3.3 months of import coverage, the highest since 2016,” said Iradian.
Pakistan’s public finances have improved substantially. The narrowing of the deficit in FY 2020/21 to 7.1 per cent of GDP was supported by continued recovery in tax revenues and prudent spending, which fell by 2 per cent in real terms. The budget for the FY 2021/22 envisages further narrowing of the overall fiscal deficit to 6.3 per cent of GDP, supported by revenue-enhancing reforms and further expenditure rationalization. Public debt, the IIF expects will remain elevated at 88 per cent of GDP by June 2022.
Sustained GDP growth hinges on further progress in re-forming the economy.
“The current IMF proramme under extended fund facility (EFF) and underlying reforms serve as anchors of macroeconomic stability. However, achieving rapid, sustained, and inclusive growth will require Pakistan to remain committed to seeing through bold and comprehensive reforms to eradicate corruption and rent-seeking behaviors, improve the business environment, stabilize finances, and effectively communicate the need for change to the public,” said Iradian.
The current gross investment to GDP ratio remains low at around 15 per cent of GDP. Experience from most emerging and developing economies show that raising growth to at least 5 per cent would require much higher investment to GDP ratio.
The IIF has noted that security concerns pose a downside risk following the Taliban’s seizure of power in Afghanistan.

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