Structural vulnerabilities can impede growth in FY22: SBP

Published July 17, 2021
The State Bank of Pakistan (SBP) noted that in the agriculture sector, the secular decline in cotton production needs to be addressed. — Dawn/File
The State Bank of Pakistan (SBP) noted that in the agriculture sector, the secular decline in cotton production needs to be addressed. — Dawn/File

KARACHI: The State Bank of Pakistan (SBP) on Friday expressed concerns that despite an encouraging economic recovery made during FY21, certain structural vulnerabilities could create hurdles for growth in FY22.

In its third quarterly report ‘The State of Pakistan’s Economy’, the SBP noted that in the agriculture sector, the secular decline in cotton production needs to be addressed.

“Timely availability of pest-resistant seed varieties and further support from agriculture extension departments, particularly to promote the adoption of climate-smart farming practices, could enable better outcomes,” the report said.

Says burden of debt servicing and narrow revenue base have left little room for investment

In the external sector, the widening of merchandise deficit needs to be contained to a sustainable level, the report noted. “Greater self-sufficiency in agriculture through adoption of better farming and crop management practices and maintenance of adequate stocks can reduce the need to import commodities (such as wheat, sugarcane and cotton) to bridge domestic shortfalls or counter temporary price pressures,” the report said.

However, the report also noted that in the agriculture sector, record output of four out of five important crops — namely wheat, rice, maize and sugarcane — offset the decline in cotton production in FY21.

“Discouraging the import of luxury consumer items and promoting greater diversification of exports, in terms of value-added items and destinations, could also help,” the report added.

The SBP suggested that efforts are required to mitigate food inflation, triggered largely by supply-side issues in the management of agriculture commodities.

“This may be achieved through better coordination among federal and provincial food departments, provision of reliable data, vigilant monitoring of stocks and food prices, and timely import of commodities,” said the report.

The twin burden of debt servicing and a narrow revenue base are leaving less fiscal room for public investment, the SBP noted in the report.

“This calls for an acceleration of efforts to broaden the tax base, increase documentation in the economy, improve public financial management, restructure loss-making public sector enterprises, and reduce circular debt of the power sector,” it added.

The Jul-Mar fiscal deficit of 3.5 per cent was lower than the 4.1pc deficit in the comparable period last year, said the report. This was mainly attributed to a rationalisation of spending, particularly a slowdown in non-priority current expenditure, and a robust increase in taxes.

“However, interest payments remained a significant burden and continued to constrain the fiscal space for development spending,” said the report

The SBP said that even as the economy rebounds strongly, stability in key macroeconomic indicators on the fiscal and external side were an additional source of comfort, as the current account and primary balance both remained in surplus during Jul-Mar FY21.

The external account received significant support from workers’ remittances as well as deferred interest payments on external debt through the G20 Debt Service Suspension Initiative (DSSI), curbs on international air travel, and lower global oil prices, said the report.

Meanwhile, on the financing side, inflows from commercial, bilateral and multilateral sources were supplemented by new inflows under Roshan Digital Accounts, which crossed the $1 billion mark in April 2021. Furthermore, the successful completion of the second to fifth IMF reviews unlocked $500 million in direct financing from the Fund. Also, Pakistan reentered the international capital markets after a gap of over three years in early April 2021. The current account remained in surplus through the first three quarters for the first time since FY04.

By contrast, the SBP’s concessionary refinance schemes, such as the Temporary Economic Refinance Facility (TERF), continued to spur the off take of fixed investment loans. Through the third quarter, loans of Rs426bn have been approved, of which Rs74bn have been disbursed under TERF, which bodes well for investment and growth going forward, it added.

Published in Dawn, July 17th, 2021

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