SBP projections for 2020-21

The SBP report on the State of the Economy in the first quarter of 2020-21 has been released recently. The report contains a very comprehensive and in-depth analysis of trends in the economy. In the first section on the Overview a set of projections is presented of the likely outcome in key macroeconomic variables of the economy in 2020-21.

The projections are, first, that the GDP growth is expected to range from 1.5 percent to 2.5 percent. Second, the consumer price index will average 7 percent to 9 percent. Third, the fiscal deficit is likely to be in the range of 6.5 percent to 7.5 percent of the GDP, Further, the current account deficit will be 0.5 percent to 1.5 percent of the GDP. Other projections are also given of the level of remittances, exports and imports. A comparison is made with the targets in the Annual Plan for 2020-21 prepared by the Planning Commission.

The picture that is painted is that the economy will emerge from the recession caused by the COVID-19 pandemic and achieve a modest positive growth rate after the fall in 2019-20. The economy will also proceed further in the path of stabilization with significant reductions in the size of the fiscal and current account deficits, accompanied with a, more or less, moderate rate of inflation.

The objective of this article is to look at the veracity of the projections. First, the differences in the SBP projections and those made by international agencies like the IMF and the World Bank are highlighted. Thereafter, an attempt is made to see if the projections are consistent with the visible trends. Finally, an alternative set of projections are presented at the end of the article in the case of some macroeconomic variables.

The three sets of projections by the SBP, IMF and World Bank are presented in Table 1. The IMF projections are from the latest World Economic Outlook Report and from the South Asia Economic Focus report of the World Bank respectively.

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                                       Table 1
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                           Macroeconomic Projections for 2020-21
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                                                 SBP            IMF       World Bank
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GDP Growth Rate (%)                           1.5 - 2.5         1.0              0.5
Rate of Inflation (%)                         7.0 - 9.0         8.8              9.0
Fiscal Deficit (% of GDP)                   -6.5 - -7.5        -6.7             -8.2
Current Account Deficit (% of GDP)          -0.5 - -1.5        -2.5             -1.5
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By and large, the SBP projections are more optimistic. In particular, the GDP growth rate is expected to range from 1.5 to 2.5 percent, while the World Bank is less sanguine about the prospects with the GDP rising only marginally by 0.5 percent and the IMF is in the middle with a growth rate of 1 percent. The other projections are generally at the upper end of the range given by the SBP. The two exceptions are that the World Bank expects the fiscal deficit to be significantly larger at 8.2 percent of the GDP, while the IMF is of the view that the current account deficit could approach 2.5 percent of the GDP in 2020-21.

The GDP growth rate projection by the SBP is based on the preliminary estimate of the growth rate of negative 0.4 percent in 2019-20 by the PBS. However, there is conclusive evidence now that this significantly understates the fall in the GDP growth rate in 2019-20. This clearly will impact on the growth rate in 2020-21.

The PBS had shown a fall of 7.8 percent as the decline in the value added by the large-scale manufacturing sector in 2019-20. However, the fall was sharper at 10.2 percent by the end of the year. The estimated growth rate in the agricultural sector was 2.8 percent and did not fall allow for the lower output of cotton and wheat. Further, the construction sector was shown as being buoyant even after the impact of COVID-19 and achieving a high growth rate of 8 percent. Based on domestic cement sales, the growth rate for the year is actually minus 4.5 percent. Similarly, the growth rate has also been overstated in sectors like wholesale and retail trade, transport and communications, electricity and gas and private services. The final estimate of the GDP growth rate in 2019-20 could be significantly lower at almost minus 2 percent. In fact, the World Bank has already estimated this growth rate as negative 1.5 percent in 2019-20.

Given the larger fall in the GDP in 2019-20, a return to the pre-COVID level of economic activity will imply a higher growth rate in 2020-21. However, there are now the risks associated with the second wave of the pandemic. As such, a more realistic projection is for the GDP growth rate to range from 1.5 percent to 2 percent. A 2.5 percent growth rate now looks unlikely.

The projected inflation rate by the SBP of 7 to 9 percent is similarly at the lower and to that by the IMF and the World Bank. An inflation rate of 7 percent is unlikely. The average inflation rate in the first six months has approached 8.7 percent. For the annual rate to be 7 percent, the average rate in the last six months would have to be only 5.8 percent. This is highly unlikely.

There is, in fact, the likelihood that the inflation rate could rise somewhat after December 2020. The international price of oil has gone up by over 30 percent and this is already being reflected in domestic prices. International food prices are also on the upswing and will impact on the import prices of Pakistan. Also, large cotton imports have to be made this year at a time of rising prices. On top of all this, there is the likelihood of a hike in power and gas tariffs. Overall, the average inflation rate could approach 9 percent in 2020-21.

There is also considerable uncertainty about the budgetary outcome in 2020-21. The SBP projection of the deficit from 6.5 percent to 7.5 percent of the GDP is also optimistic. Tax revenues have shown a growth rate of 5 percent in the first six months and the growth rate will have to approach 45 percent in the last six months if the annual target is to be achieved. There will no doubt be an upsurge in the growth rate from February 2021 onwards because revenues plummeted by 16 percent in the last four months of 2019-20 after COVID-19. However, a 45 percent growth rate is very unlikely. There could be a shortfall in FBR revenues of almost Rs 500 billion. Similarly, the revenues from petroleum levy could be smaller than budgeted because the tax rate is being brought down to reduce the impact of rising import prices of petroleum products.

There are also likely to be some higher expenditures than budgeted. Debt servicing has increased by as much as 29 percent in the first quarter as compared to the budgeted growth rate of 12 percent. Similarly, following the second COVID-19 attack, there may be need for more relief expenditures. Further, some of the power sector circular debt liabilities may have be met from the Federal budget, as happened in 2012-13. Overall, the shortfall in revenues and the spillover in expenditures could take the budget deficit back to the level of 8 percent to 9 percent of the GDP as in the last two years.

Fortunately, there is one SBP projection which appears to be of the right order of magnitude. This is the current account deficit. A surplus of $1.6 billion has already been generated in the first five months of 2020-21. However, SBP expects there to be a small deficit by the end of the year of up to 1.5 percent of the GDP. This probably reflects the higher oil import bill, larger agricultural imports and some moderation in the growth rate of remittances.

Overall, on the basis of the above analysis, an alternative set of projections in relation to the SBP projections are presented below in Table 2.

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                                              Table 2
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                                Alternative Projections for 2020-21
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                                                 SBP                     Alternative
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GDP Growth Rate (%)                           1.5 - 2.5                    1.5 - 2.0
Rate of Inflation (%)                         7.0 - 9.0                    8.5 - 9.0
Fiscal Deficit (% of GDP)                   -6.5 - -7.5                  -8.0 - -9.0
Current Account Deficit (% of GDP)          -0.5 - -1.5                  -0.5 - -1.5
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(The writer is Professor Emeritus at BNU and former Federal Minister)

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