KARACHI: The State Bank of Pakistan (SBP) has painted a bleak picture of the economy inflicted with the novel coronavirus-led slowdown despite that stabilisation measures started to yield positive results.
According to the central bank, the global and domestic spread of COVID-19 brought an exceptional set of challenges for the country. “The spillovers from the global economy and the infection-containment measures in the country are bound to weaken the economic activity and consumer demand and adversely impact supply,” SBP said in its second quarterly report on the state of the economy.
“As the situation is extremely fluid and highly uncertain, the economic outlook remains subdued compared to the pre-outbreak estimates.”
SBP said the stabilisation efforts and regulatory measures yielded notable improvements during the first half of the current fiscal year of FY2020. The current account deficit contracted to a six-year low, foreign exchange reserves increased, the primary budget recorded a surplus, and core inflation eased.
Export-based manufacturing showed signs of traction and construction activities picked up, indicating that the economy was on the path of recovery. Progress under the International Monetary Fund program remained on track and the credit rating agencies maintained their stable outlook for Pakistan during the review period.
“Further improvements will require deep structural reforms to put the economy on a firm path towards sustainable growth,” it added.
It added that improvement in current account mostly stemmed from a reduction in the import bill with some contribution from export earnings. Depressed international commodity prices partially offset the gains in export volumes offered by a competitive exchange rate. With the exception of the telecommunications sector, foreign direct investment (FDI) inflows were also about the same level as last year.
SBP emphasised that reforms needed to be prioritised to attract and sustain higher FDI inflows into the country.
The bank said the primary budget recorded a surplus, while the fiscal deficit was contained during H1-FY2020 compared to the same period last year. “This was due to significant growth in revenues despite a slowdown in the economy and the compression in imports. The reversal of earlier tax concessions and implementation of new levies helped increase the revenue collection,” it said.
“Nonetheless, the overall revenue target was missed, highlighting the scope for greater efforts to broaden the tax base and increase documentation in the economy,” SBP said, adding that the agriculture sector appears less resilient to challenges like constrained water availability and climate change.
“The cotton crop, in particular, was hit by unfavourable weather, pest attacks and low water availability. Though the prospects for the wheat crop and livestock are encouraging, the decline in cotton production is likely to undermine the agriculture sector’s performance in FY20,” it said.
SBP added that inflationary pressures continued to build up throughout the first half of FY20. While the non-food-non-energy inflation exhibited stability amid subdued demand conditions in the economy, food inflation surged steeply in both the quarters. Given that the surge in inflationary pressures was mostly an outcome of supply disruptions, which are typically seasonal and temporary and core inflation did not rise by a commensurate amount, the SBP’s projections for the average headline inflation for FY20 remained broadly unchanged at 11-12%.
SBP said the ongoing efforts must be complemented with further structural reforms to ensure that the stabilisation measures lead to a sustainable growth path for the country.
“The overall competitive environment in Pakistan has been unfavourable for productivity enhancement and growth,” it said.
“In this context, a rethinking is needed with respect to the regulatory structure of the economy. The role of the public sector should generally be limited to addressing market failures through structural reforms, and only providing broad institutional support to businesses. Where targeted interventions are inevitable to support activity in the presence of market failures, it may be ensured that these do not become entrenched.”