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Pakistan economy to witness broad recovery as COVID impact taper off

Pakistan is projected to experience a broad economic recovery in fiscal year (FY) 2021 (which ends 30 June 2021) as the economic sentiment improves with the expected subsiding of the coronavirus disease (COVID-19) pandemic and the resumption of structural reforms, says an Asian Development Bank (ADB) report.

The Asian Development Outlook (ADO) Update released today revised the 2020 growth forecast for Pakistan to -0.4% and the growth forecast for 2021 to 2.0%. In April, ADB had forecast Pakistan to grow 2.6% this year and 3.2% next year. COVID-19 severely impacted economic activity in 2020, erasing gains achieved in the first half of the fiscal year. The suspension of travel and the closure of nonessential businesses induced concurrent demand and supply shocks.

Rising food prices pushed inflation from 6.8% in FY2019 to 10.7% in FY2020, however inflation is projected to slow to 7.5% in FY2021. The current account deficit eased considerably as merchandise imports fell steeply due to containment disruptions, lower oil prices, and local currency depreciation. As inflationary pressures eased, the State Bank of Pakistan cut its policy rate by a cumulative 625 basis points from March to June 2020 to 7.0% and introduced additional measures to support the economic recovery.

“Pakistan has achieved notable success in containing the dual health and economic challenge presented by COVID-19,” said ADB Country Director for Pakistan Xiaohong Yang. “As the curve flattens and business activity resumes, the economy is showing signs of resilience and recovery. The government’s rapid mobilization on 24 August of 1.2 trillion rupee relief package comprising emergency financial support to daily wage earners, cash transfers to low-income families, accelerated procurement of wheat, support for health and food supplies, and financial support for small and medium enterprises helped shield the poor and most vulnerable during the pandemic. ADB remains committed to supporting Pakistan through this difficult period and helping the country get back on the path to growth.”

A silver lining on the supply side was agriculture, which remained largely unaffected as its growth accelerated from 0.6% in FY2019 to 2.7% in FY2020 despite a severe locust infestation that damaged the harvests of many crops, most notably cotton. Higher water availability enabled increased production of wheat, rice, and maize, as did government subsidies for fertilizer and an uptick in agriculture credit disbursement. However, industry contracted by 2.6% in FY2020 as shutdowns and supply chain disruptions related to COVID-19 exacerbated other adverse factors affecting the sector since FY2019.

The current account deficit eased from the equivalent of 4.8% of GDP in FY2019 to 1.1% in FY2020 as almost all imports recorded steep reductions in the wake of the pandemic. The deficit in merchandise trade narrowed by 27.9% as the global slowdown, lower oil prices, and rupee depreciation drove down merchandise imports by 18.2%. In FY2021, the current account deficit is anticipated to remain contained at the equivalent of 2.4% of GDP, unchanged from the ADO 2020 forecast.

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