A woman shops for grocery items at a store in Peshawar. Pakistan's 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. Image Credit: Reuters

Dubai: Pakistan’s economy has remained largely resilient to COVID-19 with policy response to the pandemic  limiting economic contraction. 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 contraction in real GDP to 0.5 per cent in 2019-20," said Garbis Iradian, Chief Economist, MENA, IIF. "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.”

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 estimates show a strong recovery in financial year 2021 (ending June), with growth of 3.9 per cent, driven by the recovery in manufacturing and services.

Accommodative policy

Monetary policy remains accommodative as inflationary pressures have eased. 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 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) 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 2021-22 as compared with 10.7 per cent in 2019-20.

Improving external position

The external position has strengthened from the surge in workers' remittances. The deterioration in the trade deficit, on the back of the sharp increase in imports, has been offset by these remittances.

Remittances increased 29 per cent in financial year 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. This 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 Pakistani expats  to send more money home. Saudi Arabia, the UAE, US, and the UK are the main source of remittance inflows. “The current account deficit narrowed from by one percentage points of GDP to 0.7 per cent of GDP in fiscal year 2020-21," said Iradian. "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.”

Public finances

Pakistan’s public finances have improved substantially. The narrowing of the deficit 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 2021-22 envisages further narrowing of the overall fiscal deficit to 6.3 per cent of GDP. Public debt will remain elevated at 88 per cent of GDP by June 2022.

Growth outlook

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," the official added. "However, achieving rapid 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.”

The current gross investment to GDP ratio remains low at around 15 per cent of GDP. Experience from most emerging and developing economies shows 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.

What is IMF’s EFF?
On July 3, 2019, the Executive Board of the International Monetary Fund (IMF) approved a 39-month extended arrangement under the Extended Fund Facility (EFF) for Pakistan for SDR 4,268 million (about $6 billion) to support the economic reform programme.

This aimed at helping Pakistan to reduce economic vulnerabilities and generate sustainable and balanced growth and focusing on

* A decisive fiscal consolidation to reduce public debt and build resilience while expanding social spending;

* A flexible, market-determined exchange rate to restore competitiveness and rebuild official reserves;

* Eliminate quasi-fiscal losses in the energy sector; and

* Strengthen institutions and enhance transparency.

The IMF has allocated additional $2.7 billion to Pakistan under its recently approved enhanced Special Drawing Rights (SDR). The enhanced funding aims to mitigate the crisis caused by the pandemic.