As the economy moves towards the end of FY20, it continues to face high uncertainty owing to the challenges posed by the COVID-19 pandemic on several economic fronts. High levels of uncertainty are also reflected in recent State Bank of Pakistan (SBP) surveys. The Consumer Confidence Survey of May 2020 recorded a sharp deterioration in both consumer confidence and expected economic conditions following their improvement in March 2020. Similarly, the Business Confidence Survey of April 2020 registered its lowest historical level for overall business confidence.
Importantly, Pakistan is not an outlier in this regard, as the global economic uncertainty index also recorded its historic peak in April 2020, indicating a global manifestation of uncertainty at present. However, going forward, there are some prospects for gradual improvement in economic activity as the government is easing the lockdown while allowing many sectors to resume activities.
Achieving the target of 2.1% growth in real GDP during FY21 will require a parallel improvement in underlying demand. This requires effective utilization of Public Sector Development Programme (PSDP) as per its allocation in the budget for FY21, while SBP schemes continue to support liquidity needs of both businesses and consumers. The gross revenue target of PKR 6.57 trillion for FY21 is challenging as it entails significant growth over FY20 in a low economic activity environment. The inflation outlook is encouraging, although not without risks. Low domestic demand should continue to support a further softening trend in CPI headline inflation and stability in core inflation over the coming months. As a result, inflation is expected to fall in the range of 7.0-9.0% during FY21.
The outlook for the external sector is reasonably comforting, with the current account expected to remain bounded. While higher competition among competing exporters amid recovering global demand in the post-COVID-19 setting may restrict any quick recovery in exports while imports are expected to remain subdued due to low domestic demand and soft international oil prices in the coming months. While workers’ remittances may remain low as current disruptions and declining oil prices have strained economies of GCC countries, some cushion in services imports may come from restrictions on international travel. Multilateral inflows may grow further and make up for some weakness in global capital inflows as more funds have been pledged by various international institutions to help governments cope with their pandemic related relief efforts.
Business conditions have deteriorated in Pakistan amid the ongoing adverse impact of the COVID-19 shock to the economy; even before the crisis, firms generally had difficult financial positions and cash supply constraints stemming from inventory build-ups and higher raw material and operational costs. Between July 2019 and March 2020, the output of Pakistan’s large-scale manufacturing segment (accounting for 75% of total manufacturing) declined by 5.4% YoY; in March alone, it declined by 22.9% YoY, after a 21.9% YoY fall in the previous month. The sectors most affected include textile, iron and steel, automobiles, and electronics.
In an effort to address firms’ liquidity problems, the central bank has introduced a number of incentives aimed to support them and prevent a total collapse; they include efforts to cut the policy rate, refinance banks at a 0% rate, encourage banks to ease collateral restrictions, and relax regulatory requirements for restructurings of loans until end-March 2021. While these incentives should go some way towards cushioning the impact, ongoing weak consumer demand and COVID-19- induced supply constraints will sustain high risks, resulting in a rise in business delinquencies.
In light of the amplified risks to the real economy, the government has adopted a stimulus package (1.2% of GDP), which includes support packages targeted at low income households, SMEs and the construction sector to provide some financial relief for such entities. This has helped to reduce inflation (8.6% YoY in June, down from 12.4% in February, right before the lockdown), prompting the central bank to cut the policy rate by a further 100 bps to 7.00% in June 2020 (cumulatively by 625 bps in the past three months).