One day, two projections: State Bank says GDP to grow 1.5-2.5pc


The State Bank of Pakistan (SPB) has projected the real GDP growth in the range of 1.5-2.5 per cent for FY21 but said risks attached with the Covid-19 could hurt the growth.

“Real GDP growth is projected to be in the range of 1.5 to 2.5 per cent in FY21. This is based on the current trends of economic activity,” said the first quarterly report of the SBP issued on Tuesday.

As the economy recovers from the Covid-19-induced contraction, it is now faced with uncertainty related to intensification of the second wave of the pandemic, said the SBP. However, downside risk to this projection includes the ongoing second wave of Covid-19, which has swept across many countries and, in Pakistan’s case, gained momentum in Novem­­ber 2020, said the report.

“The improvement in various economic indicators during 1QFY21 is encouraging. However, its continuation in the short term depends to a large extent on the trajectory of the pandemic, while sustainable growth over the medium term would require progress on the structural reforms front,” said the report.

Supply-side shocks from uncertain weather conditions cannot be ruled out either while there are also potential upsides. “These include the development and distribution of an effective vaccine and its possible early availability.”

“As for the fiscal deficit, the latest projections suggest that it remains on track to meet the annual target of 7pc of GDP,” said the report while adding that “the fiscal situation would continue to depend on the domestic evolution of Covid-19”.

The higher year-on-year fiscal deficit led to an increase in the stock of public debt, the central bank noted while highlighting that the buildup of government deposits was relatively contained compared to 1QFY20, which contributed to a lower pace of debt accumulation this year.

Regarding the inflation outlook, the SBP projected average inflation in FY21 to remain in the 7–9pc range. “It is important to highlight that food inflation, triggered by supply side factors, has been driving up headline inflation recently,” it said.

Commenting on the trend in remittances, the central bank said the projections of workers’ remittances are subject to risk from the outlook for the oil-exporting GCC economies, whose fiscal balances might deteriorate further with the escalation in global Covid-19 infections. “This may translate into a sizable reduction in their demand for foreign workers, leading to lower remittance inflows to Pakistan.”

The report said the government’s incentives for the construction sector provided impetus for its manufacturing segments. The SBP complemented this effort by assigning mandatory targets for housing and construction finance, which required banks to increase their mortgage portfolios to at least 5pc of their private sector credit by December 2021.

“In the agriculture sector, rice, sugarcane, and maize surpassed production targets during the Kharif season,” said the report. “The area for the competing cotton crop fell to its lowest level since FY82, and its yield was adversely affected by severe monsoon rains, particularly in Sindh, and pest attacks,” said the report.

The report found improvement in the services sector during 1QFY21, especially in key segments like wholesale and retail trade, transport, storage and communication.

More recently, the take-up of the Temporary Econo­mic Refinance Facility (TERF), providing financing at low rates for investment, is now seeing healthy pick-up as the economy recovers and businesses feel more confident about future prospects, said the report.

Specifically, the amount requested under Terf has increased from Rs36.1 billion at end-April 2020 to Rs441.1bn as of Nov 19, 2020, with approved financing rising from Rs0.5bn to Rs192.2bn during this period.


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