BASED on recent improvements in macroeconomic fundamentals, the State Bank has revised upward its estimate for economic growth during the present fiscal year to up to 2.5pc — as opposed to the 0.4pc contraction seen last year. The new growth projection is slightly better than the government’s target of 2.1pc and the bank’s own earlier expectation of a maximum increase of 2pc in GDP. The growth estimate is based on expectations of a steady performance in agriculture, an upturn in the services sector and a modest increase in industrial output. When compared to the bank’s buoyant readings of recent domestic economic developments in its State of Pakistan’s Economy report for 2019-20, the IMF projects GDP to expand by 1pc and the World Bank by 0.5pc. The World Bank also forecast that economic growth in Pakistan would remain subdued during the next two years. It’s not the first time that the State Bank is ‘bullish’ on the economy’s growth prospects. The bank kept projecting growth of up to 3.5pc last fiscal year in spite of a significant decline in business confidence, high interest rate, price inflation, poor farm output and industrial contraction as domestic demand shrank because of IMF-mandated stabilisation policies. It downgraded its growth estimate and almost halved its policy rate only when it became clear that Covid-19, already tossing around the major economies, was going to fast topple this country’s economy as well.

Indeed, the change in the bank’s stance during the virus outbreak coupled with the reversal of harsh stabilisation policies and the fiscal stimulus for businesses has somewhat improved macroeconomic fundamentals and business confidence. Yet it is too early to say if the current recovery is going to be sustainable, even in the short term. As the bank acknowledges in the report, its growth projections are “subject to risks, including from the evolution of Covid-19, extreme weather conditions, external demand, and progress on the reform front”. In particular, the bank says, the earlier estimates for Kharif crops (especially cotton) don’t appear promising, given the weaknesses in farmers’ financial conditions and heavy rains causing losses to standing crops. Besides, a lot depends on Islamabad’s negotiations with the IMF for resumption of the suspended $6bn EFF programme. A reversal of post-Covid-19 policies could hurt business confidence and short-term growth prospects. At the same time, the government will have to bring its focus back on governance reforms and strengthen agriculture and industry for sustainable growth.

Published in Dawn, November 20th, 2020