State Bank of Pakistan (SBP) published a Half Year Report FY22 on the State of Pakistan’s Economy on 12th Aug, 2022. As noted, Pakistan’s economic recovery continued in the first half of FY22.
Considering the first half of FY22, the large-scale manufacturing (LSM) exhibited broad-based expansion; exports grew buoyant alongside growth in FBR taxes; and Kharif crops recorded higher production. However, amid multi-year high global commodity prices, rising inflation and current account deficit posed a challenge as the year progressed. These pressures necessitated monetary tightening amidst other regulatory measures to moderate demand, the report said.
The report states that improved Covid conditions, alongside the government’s vigorous vaccination drive, paved way for largely uninterrupted economic activities. In addition, fiscal measures, including tax cuts on certain sectors and expansion in federal and provincial development spending, coupled with higher noninterest current expenditures supplemented economic growth. The lagged impact of favorable monetary conditions of FY21 along with SBP’s concessionary financing schemes; and an accommodative policy environment at the start of FY22 also facilitated economic activities and capacity expansion.
As per the report, private sector credit grew nearly fourfold in H1-FY22 on year-on-year basis. This was mainly on the back of working capital requirements that rose due to increased domestic demand, higher exports, as well as the global commodity price hike and ensuing jump in domestic wholesale prices during H1- FY22. The expansion in economic activities was also visible in the demand for loans for fixed investments and consumer financing, albeit the latter experienced a policy-induced moderation in the second quarter.
Moreover, the report underscores the importance of effective public-private dialogue in planning and implementation of economic reforms, especially as government planning around the world has become participatory, collaborative and market-oriented in nature. On this subject, the report includes a special section on trade organizations in Pakistan. Titled “Role of Trade Organizations in Economic Growth and Development: Understanding the Dynamics in Pakistan.”
With a focus on local trade organizations (TOs), the special section underscores the need for evidence-based policy advocacy by TOs, an essential element of business reform initiative, and the need to provide market complementing services to their members, the revenues from which help TOs to become financially sustainable.
Regarding trade performance of the country, the report notes that soaring global commodity prices, coupled with growing domestic demand, especially for industrial inputs, resulted in a widening of the current account deficit, despite double digit growth in workers’ remittances to US$ 15.8 billion in H1-FY22. Exports grew considerably in the first half, notwithstanding some deceleration in the second quarter. Both higher unit prices and export volumes contributed to export growth with a US$ 3.4 billion year-on-year increase in H1-FY22 to US$ 15.2 billion – which is highest ever half-yearly export outturn.
However, despite slightly slower import momentum in the second quarter, the increase in H1-FY22 imports was nearly four times the increase in exports. In addition to the dominant role of global commodity price hike, import growth was led by elevated demand for raw materials and capital goods; Covid-19 vaccine procurement; and the continued need to import wheat and sugar to plug domestic supply gaps, the report said.
Moreover, amid a widening current account deficit, the market-determined exchange rate depreciated by 10.7 percent in the interbank market during H1-FY22. However, the SBP’s FX reserves remained relatively stable till the end of H1-FY22, supported by US$ 1 billion inflow from Eurobond issuance, the additional SDR allocation of US$ 2.8 billion from the IMF in Q1, and bilateral deposits of US$ 3 billion from Saudi Arabia in Q2.
As far as increase in interest rate is concerned, the report stated that the strength of the economy, the broad-based inflationary pressures and the widening of the current account deficit necessitated a cumulative increase of 275 basis points in the policy rate during H1- FY22. This was aimed at ensuring sustainability in both economic growth and the external account, as well as anchoring inflation expectations.