Karachi, July 01, 2020: The pandemic has triggered the deepest global recession in decades. We have witnessed slowdown in Pakistan’s economy and downside risk to growth has increased. However, the fiscal and monetary authorities have responded with unprecedented economic policies including fiscal stimulus, monetary easing and debt moratorium.
The recent reduction of Policy Rate to 7 percent (625bps reduction since Mar’20) and the decision of SBP to keep real rates on forward looking basis to around zero is positive for business confidence as well as equity valuations.
The focus of FY21 Budget was the revival of the pandemic-stricken economy, coupled with focus on social spending whilst also managing the revenue stream. The government faces an uphill task of improving the fiscal health keeping in mind mammoth IMF revenue targets, whilst having introduced no new taxation measures. The revenue target of FY21 budget is PKR 6.6 trillion with a total outlay of PKR 7.3 trillion while expecting a fiscal deficit of PKR 3.2 trillion.
The outbreak of the pandemic was followed by a nation-wide lockdown which severely hampered economic activity across the country. As per the PBS, LSM output witnessed a contraction of 42 percent YoY during Apr’20 led by Textiles and Automobiles. We expect some recovery in the first quarter of FY21 as the easing of the lockdown starts bearing fruit. Macroeconomic data for the next 2 months should show a consumption-led recovery, triggered by the low interest-rate environment, while global growth is also set to rebound this quarter with most large countries having eased the lockdown.
We have witnessed a sharp improvement in the Current Account Balance (CAB) this year. May’20 saw the second surplus during FY20. During 11MFY20, CAD witnessed a drop of 74 percent to USD 3,288 million due to 31 percent decline in the total trade balance to USD 20.6 billion.
SBP Reserves during Jun’20 settled at USD 10 billion, down 19 percent since the end of Apr’20. Pressure on reserves was witnessed owing to recent debt repayments. The PKR/USD parity depreciated 3 percent during the month owing to pressure on reserves. However, disbursements amounting to USD 3,000 million from ADB, WB, AIIB and China towards the end of month should help bolster reserves.
