ISLAMABAD: The State Bank of Pakistan (SBP) released its Annual Report on Wednesday on the Status of Pakistan’s Economy for the fiscal year 2021-22, along with indications for 2022-23. The report said the country’s economy achieved GDP growth of around 6 percent, for a second consecutive year in the fiscal year 2022.
The report claims the growth was broad-based, where both agriculture and industries witnessed a notable increase that dropped over to the services sector as well. But, with the continued reliance on consumption as the key source of growth, amid lethargic improvement in productivity, the country remained vulnerable to adverse developments in the worldwide economy. Therefore, a blend of adverse global and domestic developments resulted in the reemergence of macroeconomic imbalances during fiscal year 22.
SBP Report Details
The SBP report further maintained that the expansionary fiscal stance in FY22, the increase in global commodity prices, and the outcome of the Russia-Ukraine conflict led to a noticeable deterioration in the current account deficit (CAD). Besides, the delay in the resumption of the IMF program and political instability aggravated the country’s vulnerability through the depletion of foreign exchange reserves. The resulting depreciation in the rupee manifolds inflationary pressures by magnifying the effect of the global price increase.
The report of SBP says the fiscal policy support in the form of tax incentives for industry, export, and construction, with a sufficient increase in provincial development spending, tax facilities, and subsidies to protect consumers from the impact of rising international oil prices, maintained the momentum of economic activity. Also, the protected impact of monetary stimulus rolled out during the pandemic, SBP’s targets for housing and construction, and capacity growths under Temporary Economic Refinance Facility (TERF) and Long-Term Financing Facility (LTFF) continued to underpin GDP growth. Besides, the sustained rally in domestic and global demand and receding worries about the Covid-pandemic also facilitated the momentum of economic activity during FY22.
Shortcoming and challenges
However, the impression of accommodative policies contributed to higher than-planned growth in the economy and with the speedy rise in global commodity prices, posing risks to the country’s macroeconomic stability. This also led to a considerable increase in the import bill in FY22 that significantly outperformed the expansion in exports and widened the CAD to a four-year high level. Meanwhile, on the financing side, the net inflow of foreign reserves, loans, and liabilities rose considerably against the last year but remained lower than the planned commitment during the delay in the resumption of the IMF program and internal political instability, leading to a decline in SBP liquid reserves during the Fiscal year 2022.
The external account pressures, along with the appreciation in USD index, particularly in the second half of the fiscal year, led to a substantial devaluation in the PKR, which further increased the combined effect of elevated domestic demand and the global commodity price increase, resulting in a rise in inflationary pressures. National Consumer Price Index (NCPI) inflation reached the double-digit level of 12.2 percent in FY22, surpassing the SBP’s revised projection of 9-11 percent. The food group, especially the non-perishable category, was a major source of inflation because of the persistent surge in global food prices of imported commodities (such as palm oil and tea), with the supply-demand gaps in some commodities (in particular, milk and meat). Moreover, fuel inflation also remained at an elevated level during the year. Inflation in the non-food-non-energy (NFNE) category also swelled during fiscal year 22, indicating demand and cost-push pressures.
Tax Collection
The report maintained that on the fiscal side, while the sharp pickup in imports boosted tax collection, a broad-based surge in fuel subsidies broadened the fiscal and primary deficit during FY22. The expansion in current spending clipped the fiscal space for development spending in the center during the period. The collection of tax at both federal and provincial levels nonetheless edged up. Achievement of FBR taxes witnessed a six-year high growth and slightly exceeded the upward revised budget estimate for the year. The key impetus came from import-related taxes that constituted over two-thirds of the overall FBR tax collection in fiscal year 22. In line with the widening disparities in the external and fiscal accounts, the public debt burden amplified during FY22. Also, with an increase in interest rates during the year, domestic debt servicing requirements rose during FY22.
As the macroeconomic challenges during the year increased, the government and the SBP undertook various corrective measures to restrict the pace of internal demand:
(i) Increasing the policy rate by a cumulative 675 bps;
(ii) Tightening the prudential regulations for auto and consumer financing;
(iii) Obligation of 100 percent cash margin requirements (CMR) on a number of import items;
(iv) Raising the cash reserve requirement (CRR) for commercial banks;
(v) Increasing FED on locally assembled cars;
(vi) Removal of various tax exemptions under the Supplementary Finance Act;
(vii) Ban on import of non-essential items; and
(viii) Gradual rollback of the fiscal package.
Recommendations
The report maintained that the experience from FY22 brings to the fore the need to report the country’s structural weaknesses, like a narrow base of foreign exchange earnings and inadequate foreign investment inflows. Therefore, a rigorous approach is required to encourage increased localization of the manufacturing base, along with decreasing the energy intensity of the economy by ensuring energy efficiency and conservation. Besides, amid the growing issues related to climate change and insufficient food security, there is a dire need to formulate a well-thought-out strategy to meet these challenges. Priority should be given to producing new varieties of seeds appropriate to varying weather conditions and to devising a framework that stresses water management strategies to increase agricultural productivity.
And last but not least, transforming the industry’s structure to a high technology-intensive sector is also required. However, this needs a huge increase in investment in physical and human resources for a sustained period. The rising share of the young population in the country provides an opportunity to reap the demographic dividend. Therefore, a special chapter in this report sheds light on understanding the potential of demographic dividends in Pakistan. It suggests that investment to improve the quality of human capital, and good governance, with an enabling macroeconomic environment that safeguards high savings and investments, pro-industrial policies, and effective markets are some major requirements to yield gains from the demographic window.
The complete report is available at the website of SBP:
https://www.sbp.org.pk/reports/annual/aarFY22/Anul-index-eng-22.htm
