Fitch September 20 2021: Fitch Solutions continue to forecast Pakistan’s real GDP growth to register at 4.2% in FY2021/22 (FY22, July-June). This follows an expected real GDP outturn of 3.9% in FY21, according to the Pakistan Bureau of Statistics. As highlighted in our last update, our forecast accounts for the occasional tightening of Covid-19 restriction measures due
to the still elevated number of domestic Covid-19 cases. This comes as Pakistan grapples with its fourth wave of Covid-19 outbreaks. Nevertheless, with the government likely to continue with its “smart-lockdown” strategy instead of imposing a nationwide lockdown, we do not expect Pakistan’s growth trajectory to be severely curtailed. Additionally, the pickup in the vaccination rate in recent months will likely reduce the possibility of extended lockdowns in the future. We also expect the economy to be buoyed by accommodative monetary and fiscal stances (public spending). A more assured economic outlook will bode well for consumption and investments, bolstering economic growth.
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In FY21, the Pakistan economy proved resilient towards the Covid-19 pandemic, registering real GDP growth of 3.9%. Growth was driven primarily by private consumption, contributing 6.2pp to headline figures due to base effects and strong remittance flows. Gross fixed capital formation (GFCF) contributed 0.8pp to headline figures supported by accommodative monetary policy. Meanwhile, government consumption contribution to GDP fell compared to 2020, adding 0.5pp to overall growth, compared with 0.8pp the previous year due to reduced fiscal support to the economy.
Finally, net exports subtracted 2.7pp from the headline growth figure, dragged by a rebound in imports given stronger
domestic demand and higher oil prices.
Fitch has revised our forecast for private consumption to grow by 3.6% in FY22 compared to 3.4% previously. While this still represents a slowdown from the 7.4% in FY21 due to waning base effects, improving vaccination rates will buoy consumer sentiment, facilitating a recovery in consumer spending. As of September 12, 22.8% of the population has received at least one dose of the vaccine with 9.6% of the population is fully vaccinated. Although still far from achieving herd immunity (approximately at least 70% of the population fully vaccinated), these figures represent about a seven-fold increase since our last update in June. This comes as the government is looking to vaccinate about 70 million people (31% of the population) by the end of 2021. Indeed, the country’s consumer confidence rose in July, coming in at 44.1, its highest reading since September 2019 (pre-pandemic levels). As a sign of recovering demand, purchases of major items like passenger vehicle sales have surpassed pre-pandemic levels. Additionally, our expectation for still strong remittance growth amid a stronger economic growth outlook in the Gulf Cooperation Council (GCC) economies and the European Union, will also support private consumption.
Rating agency has also revised up our forecast for GFCF growth to 8.0% in FY22 from 7.2% previously. GFCF will be driven by improving domestic and external demand outlooks alongside supportive monetary and fiscal conditions. The country’s business confidence survey by the State Bank Of Pakistan (SBP) recorded its highest ever levels in June (latest data available) since its inception, reflecting optimism surrounding the business outlook of Pakistan. Accommodative monetary policy, coupled with disbursements from the SBP’s Temporary Economic Refinance Facility (TERF) will further serve as tailwinds for capacity enhancing investments. According to the SBP estimates, TERF loan disbursements is expected to increase by 67% this fiscal year. The TERF is a concessionary refinance facility that aims to stimulate capital investment, providing a maximum loan amount of Rs5bn per project at a cost of 4% per annum.
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Increased development spending by the government will be another catalyst for growth in this component. According to Pakistan’s FY22 fiscal budget, allocations to the Public Sector Development Programme surged by 61.3% compared with the budgeted amount in the previous fiscal year, coming in at PKR2.1trn. These include infrastructure projects such as the construction of the Diamer-Bhasha Dam, the Hyderabad-Sukkur motorway and the upgrade of Pakistan Railways existing Main Line-1, among others.
Meanwhile, we revised up our forecast for government consumption growth to register at 4.3% in FY22 from our previous forecast of 3.5%. This is broadly similar to the growth rate of 4.1% witnessed in FY21. Given the continued economic uncertainty from the pandemic we expect pandemic related spending to remain broadly similar to ensure the economic recovery does not fall off track. According to the World Bank, the poverty ratio in Pakistan (using the lower middle-income poverty line of USD3.2 per person per day) will remain similar in FY22 compared to FY21 (39.2% vs 39.3% respectively).
Additionally, government consumption will also be boosted by subsidies to the power sector, to ameliorate the country’s circular debt. In short, circular debt refers to a payment deficit at the Central Power Purchasing Agency (CPPA) due to a shortfall in receivables by distribution companies. This prevents the CPPA from meeting payment obligations to power producers whom in turn default on payments towards fuel suppliers.
Lastly, we now expect net exports to subtract 1.0pp from headline growth, revised from -0.4pp previously. This comes as we expect imports to rebound more strongly than exports. Imports will be supported by increased demand for vaccines with the government recently committing USD1.1bn to procure Covid-19 vaccines. Additionally, the improving economic outlook will likely see a rebound in consumer spending and increased demand for capital goods.
Finally, with petroleum products accounting for approximately 18.0% of total imports value in FY21, elevated fuel prices will further increase Pakistan’s imports bill. Our Oil & Gas team forecasts Brent crude oil prices to average USD72.00 per barrel (/bbl) in 2021 and USD69.00/bbl in 2022 from USD43.20/bbl in 2020. Hence, we pencil in 8.0% growth in imports for FY22, a revision upwards from our previous expectation of 5.0% growth.
Meanwhile, we continue to expect Pakistan’s export growth to come in at 6.0%. Export growth will be bolstered by robust external demand amid recoveries among Pakistan trading partners such as the US, China and the United Kingdom. As these economies continue to normalise activity with the gradual easing of lockdown measures due to higher vaccination rates, the improvement in consumer sentiment in these markets will lead to stronger order flows.
Nevertheless, supply-chain disruptions due to the pandemic and rising shipping costs will slightly crimp the country’s export outlook amid disruptions in production schedules.
Risk To Outlook
The risk to the growth outlook is weighted to the downside. On the domestic front, given the more virulent delta strain in the community, amid a still low percentage of the population that are fully vaccinated, a strong resurgence in Covid-19 infections could weigh heavily on growth. On the external front, heightened security threats posed by radical groups such as the Pakistan Taliban Group could lead to social instability and the destruction of infrastructure. This might weigh on the country’s gross fixed capital outlook and exporting capabilities as businesses become hesitant to invest in capacity building infrastructure.