KARACHI: Pakistan’s GDP growth rate could rebound to 1.8 per cent in fiscal year 2020-21 owing to a recovery in private consumption but low tax revenue mobilisation and high public debt will put government’s commitment to reforms at a test, the Institute of International Finance (IIF) said on Friday.

“We expect gradual improvement in economic activity in FY 2020/21 following a small contraction in FY 2019/20 … [but] large fiscal deficit, on the back of low tax revenue mobilization, and high public indebtedness remain major challenges,” the IIF noted in its country report on Pakistan.

It said the pandemic led to a contraction in output of 0.7pc in FY 2019/20 (ending June 2020) as domestic demand declined by 2pc, while exports of goods and services have increased by 1.6pc as compared with a decline of 7.3pc in imports of goods and services.

The IIF’s outlook is driven by fewer Covid-19-related cases and deaths in the country and the government’s response, which it said was ‘adequate’.

“The Central Bank of Pakistan’s (SBP) proactive liquidity initiatives and lower policy rates are propping up economic activity and safeguarding financial stability. The policy rate has been lowered five times since February, a cumulative reduction of 625 basis points,” the IIF said.

However, it said the SBP’s monetary policy committee is likely to keep the interest rate unchanged in the next meeting as sluggish demand would likely keep the inflation in single digit.

Exchange rate flexibility is also helping to facilitate faster external adjustment. Modest current account deficit and improvement in net capital inflows could increase official reserves to $15.4 billion (excluding gold) by June 2021 — 3.3 months of imports of goods and services.

In addition, the government’s $1.5 billion fiscal stimulus package also helped insulate those affected by the pandemic through direct transfers to wage workers and poor families, financial support to small and medium enterprises and the agricultural sector, higher subsidies for basic goods, and various tax incentives.

Earlier this week, the Ministry of Finance also said that based on current economic, fiscal, monetary and exchange rate policies and on prospects for the international environment, economic activity is expected to rebound strongly within the first quarter of FY 2021.

It further noted that the signs of economic recovery have started to unfold as evident from data on macro-variables. The ministry’s outlook comes on the back of 14.4pc increase in exports, current account surplus, sharp increase in remittances, higher cement offtake and a 61pc jump in the foreign direct investment.

Retail sales, new car registrations and travel and tourism sectors have also shown signs of recovery since the government lifted economic lockdown as Covid-19 cases continue to decline.

Published in Dawn, August 29th, 2020