SBP Governor expects Economic expansion to continue

June 2, 2021

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Post announcement of Monetary Policy, Governor of State Bank of Pakistan (SBP) held a meeting with the Banking community to discuss the outcomes of MPC meeting. The Governor highlighted broad-based economic growth on the back of targeted fiscal measures and timely monetary stimulus. Governor highlighted the following points in the meeting:

SBP is encouraged by the strong rebound in economic growth as the government forecast GDP growth at 3.94% for FY21. As per SBP, the recovery has been supported by aggressive monetary stimulus and targeted fiscal measures, with a growth upturn achieved without compromising debt sustainability or external position.

SBP Governor mentioned that Pakistan has recorded one of the smallest increases in government debt post-COVID, lifting market sentiment and investment outlook.

The economic recovery has also been achieved despite fiscal consolidation in FY21, on the back of a lower deficit and largest primary surplus in past twelve years. SBP foresee economic momentum to continue with an estimation of higher growth for the next year, however, SBP remained reluctant to share GDP growth rate number for FY22.

Governor SBP mentioned that inflation has continued to rise since Jan’21, but 75% of the inflation is attributable to few food items and the impact of the February hike in electricity prices.

The current third wave of Corona in Pakistan has created fresh heightened uncertainty about the outlook and calls for some patience.

SBP has provided a total stimulus of Rs2.067 trillion, roughly 5% of GDP. The breakup of this figure suggest, a) Rs470bn stimulus is provided through a rapid reduction in the policy rate by 625bps, b) Rs657bn through the introduction of loan principal deferment program to ease cash constraints of individual and borrowers, c) Rs254bn through loan restructuring program to facilitate viable borrowers to continue business operations, d) Rs238bn via Rozgar scheme to prevent layoffs from businesses by financing wages and salaries of employees and e) Rs448bn by introducing a new scheme to incentivize investment in industry (TERF), hospitals and public health.

Registration of new firms and machinery imports provides favorable prospects for further expansion in economic activity. Currently, a variety of high frequency demand indicators confirms the strong rebound through all of FY21.
The growth up-turn has not compromised external stability, with the current account balance in surplus and SBP reserves rising to a 4 year high.

Exports gained momentum due to the performance of HVA textiles and favorable price developments. Moreover, imports recovery is broad based, including capital goods and raw materials in line with recovery, as well as one off food items.
SBP noted that remittances have continued their surge, reaching historically high levels, both monthly and cumulative, and net rise in immigrations is expected to bode well.

SBP global survey of remitters also mentioned that continued favorable prospects as majority of the migrants who remitted higher amounts in 2020 will continue to do so during 2021 and these migrants are less likely to consider relocating back to Pakistan.
Moreover, there are notable behavioral changes that could be long lasting and at play. This includes, 73% of Pakistanis switched to formal channels to remit funds to Pakistan and 64% of active remitters have switched to digital modes of fund transfers. Moreover, 98% of those switched to digital modes are likely to stick with these avenues for funds transfers in the future.
Roshan Digital Account has received US$1.2bn from the diaspora in just 8 months is a new source of support to the Balance of Payment, with significant upside potential.

Governor said that growth in private sector credit offtake remain higher than last year and is following the same pattern seen during previous growth up turns. SBP expects output gap to be mildly negative in FY22 because of capacity enhancement associated with investments made under TERF.