March 17, 2022: The availability of affordable credit played an important role in supporting industrial activity, especially in the wake of rising input costs, the first quarter report for FY22 released by the State Bank of Pakistan (SBP) on Thursday said.
Lending by commercial banks to private sector companies increased by Rs 177.4 billion during Q1-FY22, compared to a net retirement of Rs 101.4 billion last year.
Textiles, edible oil companies and oil refineries borrowed heavily for working capital, partly as a result of higher import costs. For export-oriented industries such as textiles, the Export Finance Scheme and Long-Term Finance Facility, along with ongoing payouts under the Temporary Economic Refinancing Facility, allowed them to borrow at favorable rates for working capital and fixed investment purposes, respectively, it noted.
Efforts by the government and the SBP to encourage housing financing – including through subsidized funding under the Mera Pakistan Mera Ghar (MPMG) scheme – have also begun to yield the desired results. Banks approved Rs.72 billion in funding under MPMG by the end of September 2021, of which Rs.16.97 billion was disbursed. As a result, the outstanding stock of housing and construction loans from banks had risen to Rs.305 billion by the end of the quarter, from Rs.166 billion a year earlier, it said.
The report notes that during the first quarter, Pakistan’s economy maintained the growth momentum that had begun during FY21. Both the supply and demand sides contributed to this momentum. Broad expansion in large-scale production (LSM) and improved harvest results of kharif reflected favorable supply-side dynamics; whereas strong sales of fast-moving consumer goods and cars, import volumes, energy consumption and consumer finance pointed to a pick-up on the demand side. Higher economic activity contributed to better tax revenues and a lower budget deficit. However, the substantial increase in global commodity prices contributed to an increase in inflationary pressures and a wider current account deficit.
The report notes that the continuation of the accommodative policy stance during the period July-September 2021; SBP’s long-standing refinancing schemes for exporting companies; and a growth-oriented budget FY22 – contributed to LSM growth, which rose to 5.1 percent, from 4.5 percent last year. Industries that benefited directly from the fiscal support, such as autos and construction-related sectors, also showed higher growth. In agriculture, preliminary estimates for rice, sugar cane and cotton pointed to encouraging production levels.
The report points out that this increased economic activity — combined with rising imports, repeal of corporate tax exemptions, rising domestic prices, tax authorities’ efforts and some fiscal measures — contributed to the significant 38.3 percent growth in FBR. taxes during Q1-FY22. The higher revenues drove a significant increase in non-interest-bearing expenditure, driven by an increase in development spending, purchases of Covid-19 vaccines and subsidies to the energy sector. As a result, the primary balance remained in surplus. The fiscal position also benefited materially from the reduction in interest payments on both domestic and external debt. As a result, the budget deficit fell to 0.8 percent of GDP, from 1.0 percent last year.
At the same time, the report also notes that these macroeconomic benefits were put to the test by the significant increase in global commodity prices and shipping costs during the period. Despite some slowdown from last year, CPI inflation remained at a high level of 8.6 percent during Q1 22. The food group was the largest contributor to headline inflation, amid rising prices of edible oil, poultry, wheat and sugar. Meanwhile, the sharp rise in global oil prices contributed to higher energy inflation, despite the government’s decision to partially offset the price rise by cutting taxes in July-September 2021.
The report points out that the rise in global commodity prices also played a dominant role in driving up import payments significantly. The country’s import demand also increased due to strong industrial activity, the need to import Covid-19 vaccines and capital goods imports. The increase in export receipts and remittances from workers, while very encouraging, failed to offset the increase in import payments. As a result, the current account deficit widened to $3.5 billion in Q1-FY22, and this payment pressure caused the market-driven exchange rate to fall 7.7 percent against the US dollar during the quarter.
In response to the pressure, the report states that policymakers had to make careful considerations. The primary concern was to avoid disrupting the ongoing economic momentum, especially given the heightened uncertainty caused by the spread of the Delta variant-driven Covid-19 wave during the July-September 2021 period. These concerns had to be addressed. balanced against the pressure on external accounts and expectations of higher inflation in the future. In response, the SBP’s Monetary Policy Committee changed its monetary policy stance by raising the key rate by 25 basis points at its September 2021 meeting, after keeping rates unchanged at its July 2021 meeting. The SBP also took several regulatory measures. to limit the input demand.
While the current account gap widened, the report highlights that the country’s external buffers remained intact given the availability of higher external financing. The main financial flows came from the additional SDR allocation and continuous issuance of Eurobonds. In addition, the Roshan Digital Accounts (RDAs) continued to attract interest from overseas Pakistanis, with July-September 2021 inflows of USD 849 million, and cumulative inflows from inception to USD 2.4 billion by the end of September 2021. As a result, The SBP’s foreign exchange reserves increased $2.0 billion to $19.3 billion by the end of September 2021.
The report notes that developments in the first quarter of FY22 underline Pakistan’s sensitivity to global commodity price shocks and the need for consistent policy at the sectoral level. Given the serious foreign-account and inflation implications of rising global palm and soybean oil prices, the report’s dedicated section analyzes Pakistan’s domestic oilseed sector. This section emphasizes that while the reference to domestic oilseed development can already be found in the country’s first five-year plan (1955-60), the lack of consistent policy and a dedicated and functional implementation office over the years has steadily increased the country’s dependence on imports. The section concludes with policy recommendations to encourage domestic production of oilseeds.
The report’s analysis and economic outlook is based on data for the period July-September 2021 and was completed in November 2021 using data available at the time. As such, the report did not include the January 2022 rebasing of large-scale production and GDP.
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