May 26, 2021 (MLN): A surprise to many — despite epidemiologic resurgence, Pakistan’s economy registered a V-shape recovery as GDP growth rate for FY21 is estimated at 3.94% after a 0.47% contraction in a previous financial year.
As the country’s estimated GDP outperformed the forecasts of the World Bank (1.3%) and the International Monetary Fund (1.5%), most of the market participants expect GDP growth projection to be over 4% for the fiscal year 2021 due to anticipation of higher growth in 4QFY21. No doubt, this is a pleasant upside surprise for this incumbent government.
In its recent meeting, the National Accounts Committee presented the provisional growth estimates of the GDP on the basis of the latest data of 6-9 months which were annualized.
According to NAC, the services sector remained a major growth driver for many years and this year it witnessed a growth of 4.43% in the provisional estimates.
The growth of the services sector is primarily led by the robust consumer spending post easing of COVID-related restrictions and improving consumer confidence, as also indicated by POS transactions which grew by 3.8% YoY in 1HFY21, said Hamza Kamal, Senior Investment Analyst at AKD. Within the service sector, the wholesale and retail trade sector grew by 8.37% primarily because of an increase in the marketable surplus while the transport, storage, and communication sector declined by 0.61%.
This was followed by the industrial sector that continues to be a key contributor to the GDP and leading the drive for diversification away from reliance on agri-based growth, recorded an increase of 3.77% YoY in FY21 compared to a decline of 3.77% YoY in the previous year on the back of phenomenal V-shaped recovery in Large Scale Manufacturing (LSM) sector that witnessed an unprecedented healthy growth of 9.29%, and construction sector sustaining its growth momentum, surging by 8.34% YoY due to government expenditure and private sector construction-related expenditures.
While, on the back of the historic highest ever production of wheat, rice, and maize and second-highest ever production of sugarcane, the agriculture sector grew by 2.77% in FY21 so far as against 3.31% in FY20. However, cotton has witnessed negative growth of 22.8%, which also resulted in a 15.6% decline in cotton ginning.
On the sectoral contribution to GDP, the services sector contributed 2.72% to the overall growth, the highest amongst all the sectors followed by Industries which contributed 0.69%, while agriculture contributed 0.54% during the period under review.
Shaukat Tarin, newly appointed Finance Minister, appreciated the government efforts. “A strong V growth despite being in a tough IMF program, which was necessitated by unsustainable current account deficit and falling foreign currency reserves, and a vicious Covid 19,” said Minister.
Minister said that the country would go for an ambitious six percent economic growth target in the next two years as the International Monetary Fund (IMF) shows its willingness to renegotiate tough conditions for a $6 billion loan in the wake of rising Covid-19 cases.
“The federal government will earmark as much as Rs900 billion ($6 billion) for development expenditure in the year beginning July. That’s the bare minimum we need for a country this size,” FM said.
While commenting on the estimated GDP growth rate, SBP said, “The current fiscal year 2020-21 growth is expected to rise to 3.94%, as post-Covid recovery underway since last summer has strengthened. The 9-month current account is also in surplus for the 1st time in 17 years and FX reserves at a 4-year high. This rebound was fueled by a well-calibrated policy response.”
While the latest release of 3.94 %YoY based on data points for 9MFY21 is itself encouraging, AKD research believes the final number may even cross the 4.5% YoY mark for FY21. Two elements that could drive GDP upward are LSM growth and wholesale and retail trade. On the former, AKD report expects LSM growth for FY21 to clock in at 14.5%YoY as opposed to a 9.3% estimated by authorities possibly as a result of low base (4QFY21E: 36.8%YoY vs. –24.8%YoY in FY20), and textile sector gaining from a seasonal uptick in exports in 2Q of CY overshadowing drag from the supply side issues-particularly in autos hindering production, and Ramadan effect and extended Eid holidays in 4QFY21.
The wholesale and retail trade could also beat expectation (Govt. estimates 8.4%YoY growth for FY21) driven largely by the continuation of robust consumer spending (POS transaction volume by cards, +3.8%YoY in 1HFY21), seasonal uptick in the final quarter due to Eid buying and low base effect (POS transactions by cards declined by 36.8%QoQ in 4QFY20), predicted AKD in its latest report.
A recent research report by Arif Habib Limited (AHL) has raised its FY21 growth estimate to 4.57% in anticipation of higher growth in 4QFY21.
The report expects the revised growth in LSM to be 14.1% YoY in FY21, taking the overall industrial growth to 5.89%, said Sana Tawfik, an analyst at AHL. While the agriculture sector’s growth will remain unchanged at 2.77%.
The revised growth of the service sector will be around 4.73% in FY21, with wholesale and retail clocking in at 9.4%.
The strength of the post-pandemic recovery of Pakistan’s economy is predicated purely on fundamentals, policy support and timely measures taken by the concerned authorities. Although low base supported the overall growth, several strong indicators show that the economy has turned the corner. After stabilizing, the economy is picking up pace. Yet, the country has to reach the 2018 production level as the output gap is still negative.
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