Unwinding the stimulus

EDITORIAL: The State Bank of Pakistan (SBP) Governor Dr Reza Baqir commented in a recent interview to a foreign publication that one of the two factors for higher-than-expected GDP growth in FY21 is the aggressive monetary stimulus provided by the Pakistan’s central bank which is equivalent to 5 percent of GDP and largely reliant on quantitative measures. It is an accepted fact that SBP’s response to the Covid-19 facilitated the transition of economy from stabilization to a growth path, the view of some pundits that the economy was coming out of a recession anyway and the rebound was bound to happen due to inertia notwithstanding. Apart from that, significantly restricted travel became a blessing and is reflected in the shape of record home remittances and current account surplus even though imports are growing with a pick-up in economic activities. When the pandemic hit, stabilization economic policies in Pakistan were at full throttle. The SBP took its sweet time to react, reducing the policy rate from 13.25 percent to 7 percent after ten-long weeks. Later, principal payments on loans were deferred, and refinancing schemes were offered for payment of wages by firms. Economic activities recovered well within six months of refinancing of wages and firms went back to normal trajectory after the expiry of the scheme. The total disbursement was of Rs212 billion. It helped as many as 3,331 firms to pay 1.8 million workers through this facility. This certainly helped in avoiding layoffs. But majority of SME businesses are not bankable, and these could not avail the refinancing facility. Thus, incidents of layoffs in sectors operating informally still occurred. Another significant refinancing facility was Temporary Economic Relief Financing (TERF). This scheme was offered at significantly lower rates for plants and machinery imports for new projects. The Balancing, Modernisation & Replacement (BMR) is aimed at facilitating the existing projects. It is a long-term finance, offered at fixed rates. As many as 628 businesses have availed this refinancing facility with Rs436 billion approved in loans. The scheme has already begun to yield positive results. Majority of the loans were obtained by exporters as around 60 percent of TERF was availed by the textile industry alone.

All these steps have contributed towards reaching 3.94 percent estimated growth in FY21 and will help achieve targeted 4.5 percent growth in the next fiscal year. Unprecedentedly limited travel and upbeat performance of home remittances combined with other current transfers have rendered the quality of growth much better than what was the case in the last growth spurt. The current account (C/A) is in surplus for 10 months of this fiscal year at $0.8 billion. Just to give a perspective, in FY18, 5 percent plus growth came with a current account deficit of $19.2 billion or 6.1 percent of GDP. The question is how sustainable this current account trajectory is? The imports are picking up fast and with possible increase in travel in FY22, the C/A could come back in deficit pretty soon.

The other factor that the SBP Governor emphasized that has helped attain growth was prudent and calibrated fiscal spending by the government. He emphasized it by saying that public debt had remained largely unchanged in 2020 as compared to the increase of public debt by 10 percent on average in other emerging economies during the pandemic. No doubt these policies have helped in taming the debt trajectory. However, it is also attributed to the abnormal hike in debt in the previous two years. In addition, the development spending was almost completely choked to attain fiscal discipline. Even now, little heed is paid to the losses incurred by State-Owned Enterprises (SOEs) losses and other redundant departments.

Anyway, the fact that the country ran a primary fiscal and current account surplus in the first three quarters of FY21 speaks for the quality of the growth. It is a combination of exogenous factors and indigenous policies. The question is how long this growth momentum will continue and how sustainable this economic growth will be. And a supplementary question is for how long will the stimuli continue as SBP is still running an accommodative monetary policy?

It increasingly appears that the stimuli are not likely to be withdrawn anytime soon as the prevalent view seems to be that it may be more risky to withdraw the stimulus too soon rather than too late given the uncertainties pertaining to the Covid-19. The real test will be when the C/A starts slipping and how SBP will react to it. It’s better to unwind some stimuli gradually before a bigger crisis hits.

Copyright Business Recorder, 2021