Banking 2020 and beyond:
The year 2020 was a narrative of two halves for the Pakistan economy. Despite kicking off with nascent signs of economic recovery, the emergence of the global COVID-19 pandemic and its induced lockdown measures took a toll at the country's economic performance as business activities almost came to a halt and many major sectors were severely impacted. Consequently, the country's GDP contracted by ~0.4% in FY20. However, unlike many other nations struck by the catastrophe, the recovery path for domestic economy remained brisk and structured supported by timely fiscal and monetary stimulus. Multiple initiatives by the Government and apex regulators came handy to achieving economic stabilization. Major steps included Government's relief package of PKR~1.4trn, SBP's decision to slash the policy rate by 625bps, loan restructuring and deferments allowance by the SBP and introduction of Temporary Economic Refinance Facility (TERF). The country's current account balance flipped in surplus in the first two quarters of FY21 owing to restricted imports and debt repayment relief from G-20 countries (USD~1.7bln). Although, the account turned negative again in 3QFY21 attributed to eased imports, majorly in the non-oil segment, the deficit is expected to remain below 1% of the GDP. Additionally, improved remittances and export inflows (USD~21bln, up ~7% FY21(P) YoY) kept the external account stable, with foreign exchange reserves averaging above USD~20bln in 9MFY21. This is largely credited to the overwhelming response on Roshan Digital Account, an initiative by the SBP, to encourage overseas Pakistan to remit money in Pakistan, the balance of which has now crossed USD1bln. Cumulatively, these indicators contributed to the appreciation of PKR by ~3% against USD in 2QFY21. Pakistan has also been able to secure the much-awaited IMF Extended Fund Facility (EFF) tranche of USD500mln in Mar'21 based on its satisfactory progress under the fund-supported program.
The effect of economic indicators is gradually surfacing on the Industrial Sector as well. Large Scale Manufacturing (LSM) registered a promising growth of ~9% in 9MFY21 stemming from some major sectors of the economy. However, the Industrial Sector is inevitably exposed to supply shocks due to inflationary pressure on the economic output as international commodity prices are on a continual rising trajectory. Meanwhile, uncertainty with regards to the third wave of COVID-19 and business slowdown persists while vaccination drive remains relatively slow. Considering the economic conditions, the SBP has forecasted a GDP growth of ~3% for FY21, while the Government is projecting close to 4% GDP growth. While rising inflation is one of the key concerns, the SBP hints on keeping the policy rate stable in the short-term and any change is expected to come in a gradual and measured manner.