• First half year’s performance has improved macroeconomic outlook for FY21
• Debt servicing remains a key challenge

KARACHI: The economic recovery is becoming more visible exceeding the previous forecast to reach 3 per cent GDP growth rate with 7-9pc inflation and better prospects for wheat output, State Bank’s Second Quarterly Report said on Thursday.

The report covers the first half of the ongoing fiscal year (FY21) and does not touch upon the latest development on the economic growth rate — now estimated at 3.94pc — with the SBP fully backing the figure announced by the National Accounts Committee on May 22.

“This revision (about economic growth rate) mainly incorporates the continuation of recent trends in economic activities, including manufacturing; effective control of Covid’s second wave; positive base effect from the Covid-caused slump in LSM in the fourth quarter of FY20; and better prospects for wheat output,” the SBP report said.

The macroeconomic outlook for FY21 has improved, after taking into account the developments during the first two quarters of the ongoing fiscal year while business confidence has also been steadily improving, the report said.

It noted that debt servicing continues to be a challenge as revenue generation in the country is currently insufficient to finance the bulk of the mark-up payments.

“During H1-FY21, nearly 23pc of the interest payment was financed via the accumulated primary surplus; rest was financed via additional debt accumulation,” said the SBP.

Primary surplus means the tax revenues exceed programme spending ignoring spending required for interest on outstanding debt.

“This indicates the need to expand the revenue base, notably by accelerating the ongoing documentation drive and plugging leakages in tax collection,” said the report. It went on to add that on the expenditure side, non-interest expenses declined in both quarters, including on development, defence, pensions and the running of civil government.

“As a result, the primary balance remained in surplus in both quarters of FY21, while the overall fiscal deficit was almost unchanged at last year’s level in terms of per cent of GDP,” said the report.

The SBP provided cash as stimulus for the recovery of economy as the Covid-19 pandemic spread. According to the central bank’s report collectively, the estimated cash flow impact of these schemes for businesses and households was equivalent to nearly 5pc of the GDP. “The overall size of SBP support is Rs2,101 billion,” it noted.

In the fiscal sector, the SBP’s projection for the budget deficit is unchanged, reflecting balanced risks. On the downside, the receipt of Gas Infrastructure Development Cess (GIDC) payments after the apex court’s decision would improve the overall fiscal balance, said the report.

Meanwhile, the upside risk stems from some un-budgeted expenses; the government could likely incur in the remaining part of FY21. The largest of these is the government’s recent MoUs with multiple independent power producers (IPPs), which may entail a sizable upfront payment, said the report.

The SBP’s full-year CPI inflation projection is unchanged, in the range of 7-9pc, the report said.

The current account deficit is now projected to be in the range of 0-1.0pc of the GDP, against the earlier projected range of 0.5-1.5pc shared in the First Quarterly Report of FY21.

Published in Dawn, June 4th, 2021

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