LAHORE: A Fact Sheet issued today by the Institute for Policy Reforms takes note of positive action by government to inject liquidity in the economy to boost demand and production. “It is no surprise that as updated economic data came in, PBS has revised FY 21’s real GDP growth rate to 5.37%”. Rebased GDP growth rate came to 5.57%.
The Fact Sheet notes that while the economy grew at about 5.5% in FY 18, it left severe macroeconomic imbalances in its wake that needed a period of stabilization by a tight monetary policy, exchange rate adjustment, and cut down in public spending. This situation was made more complex by the pandemic.
Some key decisions taken at that moment helped stimulate economic activity. A fiscal stimulus package of Rs1.24 trillion in April 2020 offered much needed cash transfers to the vulnerable, tax refund to exporters, and subsidized loans for SMEs and agriculture. SBP added liquidity in the economy through several concessional credit windows more notably TERF that stimulated production. Other measures helped save jobs at a time when lockdown had slowed production.
Credit to private sector, a major indicator of economic activity, has grown consistently since 2020. According to SBP, the increase in credit is for both fixed investment and working capital. Correction in SBP’s policy rate was important in increasing credit to the private sector
Emergency cash transfers under Ehsaas also played a major role. A campaign to attract workers’ remittances through banking channels improved the current account balance. Workers’ remittances to Pakistan grew from $19.9 billion in FY18 to $29.3 billion in FY21. In first half of FY22, they have grown by a further 11%.
After a period of correction in public investment, government boosted public investment in key areas to stimulate economic growth and create jobs. Public Gross Fixed Capital grew by 38% in FY 21. These investments were in power generation and transmission, energy supplies including in refining capacity, highways, and ports, areas that support private sector economic activity and boost productivity.
All these developments boosted aggregate demand, which increased by 15.6% in FY 21 YoY. In FY 20, aggregate demand grew by 6.6%. In FY 21, merchandise exports grew by over 18%, and by 28% in FY 22, July-December as global economy recovered. Overall, Large Scale Manufacturing increased by 14.86% in FY 21.
Economic activity has been active across all sectors. According to GoP data, in FY 21, agriculture grew by 3.29%, industry by 8.94 % and services by 4.92%. Total size of GDP in FY 21 was Rs. 55, 488 billion. all indications are that economic growth is still buoyant. Finance Ministry data shows that for Rabi 2021-22, wheat has been sown on 22.8 million acres. GoP expects wheat production to meet its target of 28.9 million tons. Input supply has been good. Agriculture credit has grown, tractor sales are up 21%, and fertilizer off take has grown in double digits.
Large scale manufacturing has continued to grow. Year on year, it was up 3.3% during July-November FY 22 on the back of almost 15% growth in FY 21. During July-December FY 22, growth has been positive in eleven of the fifteen industries for which PBS compiles data. Car production and sale increased by 72.8%, Trucks & Buses production increased by 65.6%, and tractor sales grew by 21.2%. The country’s electric power consumption grew by 9.2% during July-October FY 22.
Incentives for construction stimulated economic activity, including in industries with linkages to construction.
This positive picture did not just happen. It is the result of key decisions taken in full confidence of their salutary effect on the economy.
Yet, the situation is not without risks. If increase in global commodity prices, especially in energy, were to occur, it would dampen economic activity in Pakistan. Also, as production is dependent on imports, the current account deficit is a cause of future concern.
There are other challenges brought by new variants of the virus as well as from enduring macro-economic issues that successive governments have been unable to address, and which include low rates of savings and investment, inadequate production capacity and minimal productivity gains. Resultantly, economic growth soon leads to a vulnerable external sector. And the ‘mini budget’ could not have sent positive signals to the market, though stability is needed for the country’s economic health.