SBP terms 3.9% GDP growth during FY21 a notable feat

July 20, 2021 (MLN): Pakistan’s economy has joined back its track and made promising recovery with provisionally estimated GDP growth to be 3.9 percent for FY21. This performance was achieved despite the ongoing pandemic, which had played a part in restricting GDP growth to -0.5 percent last year.

The State Bank of Pakistan in its third quarterly report ‘The State of Pakistan’s Economy’ noted that the performance was primarily attributable to a turnaround in the industry and services sectors. Within industry, the growth in food, automobile, textile, and construction-allied segments of large-scale manufacturing stood out.

The growth was broad-based, with the agriculture, industry and services sectors expanding by 2.8 percent, 3.6 percent, and 4.4 percent respectively. The economic turnaround was enabled by the supportive policies of the government and central bank, which mitigated the health and economic fall-out of Covid on the economy.

With regards to the agriculture sector, the report noted that the agriculture sector recorded the growth of 2.8 percent during FY21, compared to 3.3 percent a year earlier. Almost all the important crops performed better than last year. Specifically, during Rabi FY21, wheat production grew by 8.1 percent compared to a year earlier, as subsidies on inputs and an increase in the minimum support price contributed to the increase in cultivated area of wheat.

Moreover, after accounting for Rabi season cultivation, the maize crop grew by 7.4 percent over the full year, driven primarily by an improvement in its yield. The latest estimates of crop production during the review period added on to the strong performance of rice and sugarcane during FY21. However, there was a notable decline in cotton, whose provisional estimates were revised further downward to around 7 million bales i.e, a 22.8 percent decline in production compared to last year. This represents the lowest level of cotton production since FY85, attributed to a continuing fall in cultivated area and depressed yields due to exceptionally heavy monsoon rains and pest attacks.

The government's policy support consisted of subsidies for fertilizer, fungicides and weedicides, and an increase in the support price of wheat. Specifically, DAP, phosphate, and potassic fertilizer received a subsidy of Rs 1,000 per 50 kg bag, while weedicides and fungicides received a per-acre subsidy of Rs 250 and Rs 150 respectively.

The subsidy on DAP contributed to a 2.3 percent increase in its offtake during Oct-Mar FY21 compared to a year earlier. However, the impact of the subsidy was diluted by an increase in the price of DAP. Given that the majority of domestically available DAP is imported, its price tends to follow the trend in global price of the commodity, which rose by 49 percent, on average, between Oct-Mar FY21. The rapid increase in the global price of DAP somewhat restricted its offtake during the review period.

By contrast, urea prices had declined by 10.7 percent during Oct-Mar FY21 following a reduction in the Gas Infrastructure Development Cess (GIDC), which contributed to its higher offtake. Ultimately, even though urea did not receive subsidy, its offtake increased by 12.4 percent during Oct-Mar FY21.

Meanwhile, agriculture credit disbursements were 4.6 percent higher during Jul-Mar FY21 compared to a year earlier. That said, the pace of disbursements picked-up during Q3-FY21, showing an increase of 13.1 percent. The farm sector witnessed growth in production loans associated with working capital needs in the third quarter. In addition, there was also a pick-up in long-term loans for development purposes.

In the non-farm sector, the increase in disbursements to the poultry sector stood out during Q3-FY21 compared to last year. Previously, supply-side losses incurred by producers during the strict Covid lockdowns appeared to be holding back credit off-take in H1-FY21. This pattern changed in the third quarter, with higher Q3-FY21 disbursements suggesting that there was recovery in the demand for poultry items during the review period.

Meanwhile, the livestock sector grew by 3.1 percent during FY21, compared to 2.1 percent a year earlier. This could mainly be traced to a recovery in the poultry sub-sector, which had been hit hard by the strict lockdowns from March 2020 onwards during the first wave of Covid, but gradually recovered in FY21 as the government shifted to smart lockdowns.

Being the major driving force of the economy, the performance of industrial sectors always remains the burning question. Considering this, the quarterly report by SBP depicted important facts and figures which are important to be known.

Provisional estimates pointed out that industrial sector made a quick recovery during FY21 compared to FY20. Against contraction of 3.8 percent last year, the sector saw expansion of 3.6 percent in FY21.The performance can primarily be attributed to ease in lockdown conditions across the country, and conducive economic policies.

The smart lockdowns were complemented by targeted fiscal support and highly accommodative monetary policy. For the fiscal part, government announced special packages for various sectors of the economy. In particular, construction sector, due to its labor-intensive nature, was targeted with incentives for real estate developers. This led to expansion in construction and its allied industries.

Aiding the government in its efforts to revive the economy, the SBP decreased its policy rate and announced various temporary schemes such as facilitation of new investment under TERF, support for the health sector under RFCC, loan extension and restructuring, and SBP Rozgar scheme, amongst various other measures. Proactive steps by the government and the SBP to encourage more inflows through formal channels also helped attract record inflows of workers' remittances, which drove up demand.

Within industry, Large Scale Manufacturing (LSM) rebounded sharply in the review period, growing by 9.0 percent during Jul-Mar FY21 compared to a contraction of 5.1 percent in the comparable period last year. LSM growth was driven by food, cement, textile and automobile sectors. Within the food group, better harvest of the sugarcane crop led to expansion in sugar output.

Output of the textile sector expanded by 5.9 percent during Jul-Mar FY21 compared to contraction of 2.6 percent last year. Cotton textile segment witnessed a rebound during Jul-Mar FY21. When compared to production numbers during the same period last year, cotton yarn and cotton cloth registered growth of 3.2 and 3.0 percent in the Jul-Mar FY21. Almost all the gains in the cotton textiles were made during Q3-FY21, as yarn and cloth production rose by 9.9 and 9.7 percent, respectively, compared to last year.

That said, when comparing the production estimates with the lockdown-free Q3-FY19, the growth in Q3-FY21 at 3.7 percent is more subdued. The rebound in textile sector seems to be partly related to the base effect which in turn was caused by the Covid-induced lockdowns in FY20.

Facilitated by the government's construction package, the construction allied industrial sector continued to grow. Specifically, the industries of cement and steel grew by 25.1 and 1.7 percent, respectively, during Jul-Mar FY21. The rebound in steel was particularly impressive, given that it had contracted by 8.0 percent in the same period last year.

The robust performance of the construction sector was largely owed to the pickup in private sector activity. Moreover, even though the government decreased development expenditures by Rs 83.7 billion during Jul-Mar FY21 compared to last year, its construction package coupled with various other incentives for the industrial sector aided growth in the construction sector.

These efforts drove the offtake of Rs 2.2 billion for construction financing in Q3-FY21. In addition, consumer financing for housing saw disbursements of Rs 13.8 billion during Jul-Mar FY21 compared to net retirements of Rs 5.6 billion last year.

The petroleum sector rebounded sharply to register growth of 12.7 percent during Jul- Mar FY21 compared to 17.5 percent contraction last year. Even compared to Jul-Feb period last year, when the Covid situation had not started to impact activities, the improvement is quite visible in FY21 i.e, 7.7 percent growth in Jul-Feb FY21 against contraction of 13.6 percent during Jul-Feb FY20.

The Jul-Mar FY21 growth can largely be attributed to an increase in production of petrol, diesel, and furnace oil. Rebound in overall economic activity had a positive impact on transportation activities, which in turn led to increase in demand for POL products. Surge in automobile sales, especially in the wake of low-interest rates, further facilitated transportation activities in the country.

The automobile sector improved from sharp contraction last year, to double digit growth (23.4 percent) during Jul-Mar FY21. The sector gathered the pace during the review period, which is evident from quarterly breakdown of growth rate. The increase in economic activities had a positive effect almost across the board; cars (24.7), motorcycles (20.3), LCVs (30.2) and tractors (57.5) all witnessed double-digit growth.

The impact of the low interest environment is evident from increase in consumer financing for purchase of vehicles to the tune of Rs 73.6 billion during Jul-Mar FY21 compared to Rs 3.2 billion last year.

Under the Automotive Development Policy 2016-21, various new auto-assemblers had invested resources in the automotive industry. In order to attract consumers, the new entrants introduced vehicles with new features and also focused on SUVs, which previously had relatively little penetration in the country compared to sedans or hatchbacks. This strategy attracted high-end consumers and, with sales picking up, new entrants have started to gain some foothold in the domestic market.

Apart from the aforementioned factors, government incentive packages to revive the economy from negative shock of Covid also had a positive impact on the automobile sector.

Providing the insights of the labor market, the report indicated that employment within the industrial sectors of Sindh and Punjab continued to recover during Jul-Feb FY21. The employment growth for the large-scale manufacturing sector of Sindh and Punjab in Jul-Feb FY21 stood at 1.1 percent in comparison to 0.6 in the Jul-Feb FY20.

The impetus mainly came from industries related to food-processing and cigarette manufacturing, while automobile and cotton textile also contributed positively to employment growth; these developments were broadly in line with the LSM growth observed for these sectors. The February 2021 wave of SBP's Business Confidence Survey also showed an improvement in the current employment index for the industry and services sectors.

However, future employment expectations, as captured by SBP's Consumer Confidence Survey, deteriorated in the March 2021 survey iteration, due to the beginning of the third Covid wave and subsequent restrictions to subdue it.

As for wages, there was 6.5 percent growth in the construction sector wage-rate index in Jul-Mar FY21. Meanwhile, increase in the earnings of the household servants and mechanics decelerated in the current quarter in comparison to the previous quarter. The growth in doctor clinic fees was at constant 16.0 percent in Q2-FY21 and in Q3-FY21, indicating increasing income for doctors.

The positive performance of the commodity-producing sectors provided the impetus for a 4.4 percent growth in the services sector, compared to a 0.6 percent contraction last year, the report said.

Specifically, there was a notable turnaround in wholesale and retail trade growth due to an increase in overall economic activity and imports, whereas finance and insurance and general government services also picked up the pace compared to a year earlier. Although, transport, storage, and communication activities recorded marginally negative growth, the magnitude of contraction was smaller than the one observed in FY20.

The report also stated that the wholesale and retail trade segment witnessed an impressive growth of 8.4 percent during FY21- the highest growth since FY06. Along with base effect, the segment benefitted from robust performance of LSM, rise in import quantum, and healthy agriculture production. The increase in activity in this segment was further evident from Google mobility data. The visits to 'grocery and pharmacy' and 'retail and recreation' segments were up by 41 percent and 14 percent by end-March 2021 from their baseline (pre-Covid) position.

The performance of finance and insurance subsector was also remarkable, as it recorded growth of 7.8 percent in FY21 compared to growth of 1.1 percent witnessed in FY20. This was mainly due to rise in deposits and loans of banking industry.

In contrast, the transport, storage and communication subsector continued to observe contraction during FY21 on the back of slack performance in the transport sector. However, the magnitude of contraction was smaller than the one seen in FY20. The second and third wave of Covid and subsequent limited inter and intra-city mobility had a negative bearing on transport sector.28 Particularly, the Q3FY21 period appeared to be challenging for PIA, as the national flag carrier booked gross losses of Rs 3.6 billion on account of Covid restrictions.

In the communication subsector, however, the demand for internet services continued to rise, as remote-working and online-education arrangements remained in place due to Covid. This demand led to increase in cellular tele density to 84.6 percent as of end-March 2021 from 80 percent as of March 2020. Similarly, broadband users in the country increased from 82.7 million as of March 2020 to 98.0 million as of end-March 2021, the report noted.

The other private services subsector grew by 4.6 percent during FY21. Within other private services, the exports of information and communications technology (ICT) related services witnessed a growth of 43.6 percent, YoY, and reached to US$ 1.5 billion during Jul-Mar FY21. The country's IT services firms continue to make deeper inroads into the global market, utilizing the growth in demand amid the pandemic for a wide range of IT services.

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Posted on: 2021-07-20T10:34:00+05:00