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Annual Report FY20 Title Cover ANNUAL REPORT 2019 – 2020 THE STATE OF PAKISTAN’S ECONOMY STATE BANK OF PAKISTAN SBP BOARD OF DIRECTORS Dr. Reza Baqir Governor & Chairman Mr. Naveed Kamran Baloch Secretary, Finance Mr. Atif R. Bokhari Member Mr. Azam Faruque Member Mr. Muhammad Saleem Sethi Member Mr. Ali Jameel Member Dr. Tariq Hassan Member Mr. Mohammad Mansoor Ali Corporate Secretary LETTER OF TRANSMITTAL State Bank of Pakistan Karachi. November 11, 2020 Dear Mr. Chairman, In terms of Section 9A(2) of the State Bank of Pakistan Act, 1956, the Annual Report on the State of the Economy which includes the review of fourth quarter on the State of the Economy for the year 2019-20 is hereby enclosed for submission to the Majlis-e-Shoora (Parliament), by the Board of the State Bank of Pakistan. Yours sincerely, (Dr. Reza Baqir) Governor Chairman Board of Directors Muhammad Sadiq Sanjrani Chairman Senate Islamabad LETTER OF TRANSMITTAL State Bank of Pakistan Karachi. November 11, 2020 Dear Mr. Speaker, In terms of Section 9A(2) of the State Bank of Pakistan Act, 1956, the Annual Report on the State of the Economy which includes the review of fourth quarter on the State of the Economy for the year 2019-20 is hereby enclosed for submission to the Majlis-e-Shoora (Parliament), by the Board of the State Bank of Pakistan. Yours sincerely, (Dr. Reza Baqir) Governor Chairman Board of Directors Asad Qaiser Speaker National Assembly Islamabad Chapter 1 Economic Review 1 Economic Review 1.1 Overview Prudent monetary and fiscal policies, first 8 months of the year. This decline was supported by the IMF’s Extended Fund attributed primarily to a sharp contraction in Facility program, helped the economy move imports following demand compression and progressively along the stabilization path regulatory measures, alignment of the during the first eight months of FY20. The exchange rate with market fundamentals, and economy also saw a notable, smooth transition a steady shift in the energy basket from to a market-based exchange rate system, expensive fuels to hydel and coal. The which was pivotal to addressing the external economy also saw a record surge in foreign imbalances and rebuilding the foreign investment in the domestic debt market, as exchange reserves buffer. This structural global fund managers expressed confidence in adjustment, along with the government’s better macroeconomic and exchange rate adherence to its commitment of zero SBP policies while tapping on the interest rate borrowing, improved overall monetary differential and tax-related reforms. The management and functioning of financial improvement in the current account bolstered markets. A significant contraction in the twin market sentiment and helped the SBP rebuild deficits was visible from the start of the year. its foreign exchange reserves; support also However, as the exchange rate was made came from reengagement with the IMF and more flexible and utility prices and taxes other multilateral lenders. The elevated level adjusted to rein in the fiscal deficit, of foreign exchange inflows allowed the SBP inflationary pressures rose temporarily. to unwind its short-term forward and swap Overall, the improving macroeconomic contracts to the tune of US$ 5.2 billion during fundamentals helped restore consumer and the period. This implied that the actual business confidence, which set the stage for a increase in the SBP’s reserves position was recovery in the real sector. US$ 10.7 billion during Jul-Feb 2020 – an average improvement of US$ 1.3 billion a However, just as early signs of this recovery month. were beginning to emerge, the global and domestic spread of the coronavirus (Covid- Similarly, on the fiscal front, the consolidation 19), and ensuing containment measures, hit momentum gathered pace during the pre- the economy hard. Manufacturing, retail, Covid period, as reflected in the first primary transport and trade-related activities were surplus over the first nine months of the fiscal disrupted, causing a severe contraction in real year since FY16. On the revenue side, the GDP growth. At this critical point, better government reversed multiple tax concessions macroeconomic fundamentals and subdued given last year, which led to an increase in the inflation risks provided policy space to extend GST rate on petroleum products, resumption relief measures to businesses and households; of collections on telecom, and an increase in without these measures, the economic and the minimum threshold for income tax social fallout of the Covid crisis would have collection. In addition, the government been much worse. eliminated the concessionary tax regime for voluminous items, such as textiles, sugar, Macroeconomic trends and policies before and edible oil, steel, and cigarettes, which led to after the Covid spread higher collections compared to last year. Nonetheless, overall tax performance fell The country’s external and fiscal sectors somewhat below the ambitious target, as posted strong performances compared to last import-related collections weakened year, before the domestic spread of Covid-19 significantly. Here, non-tax receipts, (Table 1.1). In particular, the current account stemming primarily from higher SBP profits had posted a significant improvement in the and GSM license renewal fees, supported State Bank of Pakistan Annual Report 2019-20 Major Macroeconomic Indicators Table 1.1 FY18 FY19 FY20 Full-year Full-year Full-year Jul-Feb Mar-Jun Actual Jul-Feb Mar-Jun Actual Target percent growth Real GDP 5.5 1.9 -0.4 4.0 Agriculture 4.0 0.6 2.7 3.5 Industry 4.6 -2.3 -2.6 2.3 o/w LSM 5.1 -1.6 -3.7 -2.6 -2.9 -24.0 -7.8 1.3 Services 6.3 3.8 -0.6 4.8 Private sector credit 14.9 10.3 1.2 11.6 3.8 -0.8 2.9 National consumer price index 4.7 6.0 8.3 6.8 11.7 8.9 10.7 5-7 Exports 13.7 1.7 -6.1 -1.1 3.6 -26.7 -6.8 6.2 Imports 14.9 -6.3 -16.4 -9.9 -13.9 -28.2 -18.6 0.8 Exchange rate (+app/-dep%) -13.7 -12.5 -13.3 -24.1 3.8 -8.2 -4.8 percent of GDP Current a/c balance -6.1 -3.4 -1.4 -4.8 -1.0 -0.1 -1.1 -3.0 Primary balance* -2.2 -1.2 -2.4 -3.6 0.5 -2.3 -1.8 -0.9 Fiscal balance* -6.5 -5.1 -4.0 -9.1 -4.0 -4.1 -8.1 -7.5 Gross public debt* 72.1 74.2 86.1 86.1 84.4 87.2 87.2 NA billion Rupees Total revenue* 5,228.0 3,583.7 1,317.0 4,900.7 4,689.9 1,582.3 6,272.2 7,458.0 Total expenditure* 7,488.4 5,506.2 2,839.4 8,345.6 6,376.1 3,272.4 9,648.5 10,740.0 billion US$ Change in SBP FX reserves -6.4 -1.7 -0.8 -2.5 5.5 -0.6 4.9 Workers' remittances 19.9 14.3 7.4 21.7 15.1 8.0 23.1 24.0 Foreign portfolio investment 2.2 -0.4 -1.0 -1.4 2.1 -2.7 -0.5 2.3 FDI in Pakistan 2.8 0.8 0.6 1.4 1.9 0.7 2.6 4.3 Change in net forward position (incl. swaps) -2.8 -0.8 -0.3 -1.1 5.2 -2.9 2.3 *The data in Jul-Feb and Mar-Jun column is for Jul-Mar and Apr-Jun respectively. Source: PBS, SBP, MOF revenue mobilization. Progress on rate by 100 bps in July 2019, the SBP kept the expenditure control on the development side policy rate unchanged. As expected, after was also evident, although high debt servicing plateauing in January 2020, food inflation also cost and a steady increase in social transfers began to recede, as seasonal (and import) (grants) doubled the growth in overall supplies resumed and the government expenditures. Nonetheless, the authorities initiated a countrywide crackdown on refrained from issuing supplementary grants hoarding practices. during the year. Thus, at the time the Covid-19 infections Trends in inflation also pointed toward began to increase, the country had already subsiding demand-side pressures. Although made noticeable gains on the macroeconomic inflation in the non-food-non-energy segment stability front. This made it possible to extend of CPI remained at an elevated level – as the aggressive policy support to businesses and economy absorbed the impact of the exchange households to help them cope with the rate depreciation of the previous year, taxation necessary mobility restrictions and ensuing measures announced in the FY20 budget and supply-chain disruptions. Those in special higher fuel and transportation costs – its trend need of immediate policy support included stabilized as the year progressed. manufacturing firms – as factory closures Nonetheless, supply-side pressures remained tightened cash cycles and raised the risk of strong in the food market, as temporary surging unemployment – and a number of disruptions triggered speculative sentiments services concerns, especially in the hospitality and contributed to price build-up. While these industry, such as event management, catering, developments weakened consumer restaurants, food deliveries, salons/barber confidence, they were not entrenched enough shops, and travel and ticketing. Wherever to affect the SBP’s full-year inflation possible, the adoption of digital channels (such projections and influence monetary policy as teleworking and e-commerce) supported decisions. Thus, after increasing the policy business continuity, but given the weak digital 4 Economic Review landscape, most businesses struggled (Special Composition of the Estimated Figure 1.1 Section ).
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