It might be rough going in 2021, but the wheels of industry will continue churning…..
Dr. Waqar Masood
Special Assistant to the Prime Minister on Revenue
With the backdrop of the recent surge in petroleum prices, new challenges have arisen in the country. There is pressure on food supplies as the production of important crops went down by 30-40 percent. The situation will pose a big challenge for the local industry in the coming months and severely affect the export sector as well as the country’s foreign exchange. The government’s main concern is the uninterrupted and low-cost provision of sugar and wheat so that the public does not have to experience a similar crisis like that of the last year. Wheat accounts for 8.9 percent of value addition in agriculture and 1.6 percent of the total GDP of Pakistan. In the last five months of 2020, the government had to import over two million tons of wheat out of a target of three million tons.
Nonetheless, overall exports have picked up in recent months while the large-scale manufacturing sector posted 6.6 percent year-on-year growth in October 2020. The country logged unprecedentedly high remittances of above $2 billion for six consecutive months, while the current account recorded a surplus for the fifth consecutive month in November 2020 at $447 million as compared to a deficit of $326m during the same month in 2019. This turnaround in the current account, together with an improvement in financial inflows, raised the State Bank of Pakistan’s foreign exchange reserves by around $1 billion in November 2020. Moreover, the current fiscal year-to-date performance has helped amass a sufficient foreign exchange reserves buffer to support any rise in the trade gap.
These accomplishments are truly incredible because Pakistan achieved these milestones at a time when it is still reeling from the COVID-19 catastrophe.
The government’s timely strategies to mitigate the pandemic’s adverse economic impact were also notable and significantly helpful. On the one hand, the Ehsaas Programme cushioned the vulnerable segment of society; on the other, the packages for the construction sector created a prosperous ripple effect for all the associated industries like steel, cement, and so on. Production of billets and ingots, which are sold primarily to the building and construction market, increased by around 55 percent in October 2020. Cement production increased by 25.1 percent.
The improvement in various economic indicators during the first quarter of fiscal year 2020-21 is evidence of positive development in most economic sectors. The government has managed to give a promising performance so far. However, its continuation in the short-term largely depends on the trajectory of the pandemic. By contrast, sustainable growth over the medium-term would require progress on the structural reforms front.
President Karachi Chamber of Commerce and Industry (KCCI).
The adverse impact of the COVID-19 pandemic in Pakistan had already kicked in even before a lockdown was imposed in March. The restrictions in other countries meant a decline in international trade, including a sharp drop in the number of Pakistani exporters’ orders. The pandemic disrupted the global supply chain so significantly that it might take certain countries years to fully recover.
History has repeatedly proven the resilience of Pakistan and its people. Whether this great nation faces poor economic conditions, terrorism, or natural disasters like devastating earthquakes, the country always bounces back stronger than before. The situation with this pandemic is no different.
After a few challenging months, the country’s economic activities have already started to regain traction, and the business and industrial community is eager to get things back on track. However, the expectations for 2021 are not very optimistic. Several global and domestic factors will continue to restrict economic growth throughout the year, and businesses are expected to struggle as they navigate the new normal.
Pakistan’s trade with its partners is likely to increase with time. The country’s export businesses are already meeting their orders and getting new ones; the import sector is also reverting to its previous performance as domestic consumption picks up. This may lead the country to experience a worsening Balance of Payments position, but the rise in remittances will possibly soften this blow to the external sector as global economies stabilise, and the government’s current policies continue to promote the usage of formal channels for transmitting funds.
The agriculture sector will also continue to grapple with maintaining a steady output since the pandemic has also hit key sectors that support farming and cultivation. Furthermore, Pakistan has accumulated considerable debt over the years — it will spend almost three trillion rupees of public money on debt repayments and interest in 2020-21. And chances are high that the government will consider implementing the more stringent demands of the International Monetary Fund (IMF) to seek further loans. In such a scenario, the tariff and taxation environment for businesses will likely worsen, leading to an upsurge in the cost of doing business.
Apart from this, the country will persistently suffer from the factors that have been consuming its resources for many decades, including tax evasion, corruption and the monumental costs incurred by certain failed State Owned Enterprises (SOEs). Their registered net losses stand over Rs. 250 billion annually as well as their burgeoning circular debt, which has swelled to a massive Rs. 2.3 billion in December 2020.
All this means that Pakistan’s economy will witness a number of demand-pull and cost-push inflationary tendencies throughout the year that will create a ripple effect where inflation will impact all sectors of the economy, making the life of the common man even more difficult.
However, in the past, our nation has battled with these issues in one form or another, and stabilising conditions may lead to the positives outweighing the negatives. In time, certain sectors will undoubtedly emerge that would benefit greatly from the recovering economy, and they will be able to trigger favourable conditions for the masses. For instance, construction and its affiliated sectors are expected to benefit from recent government policies and initiatives such as the Naya Pakistan Housing Scheme.
It should not be forgotten that COVID-19 is not a thing of the past. There are still uncertainties regarding the pandemic intensifying and the effectiveness of the vaccines being developed. How these factors play out remains to be seen. For now, it seems that 2021 will be a challenging year for the country, but will put the economy on a path of recovery and growth if viable decisions are taken by providing much-needed support to businesses and industries.
Director Sui Southern Gas Co. Ltd (SSGC), Director PNO Capital Ltd.
Looking beyond the chaos of 2020, the investment outlook for 2021 envisages recovery in the year ahead. Improving macro indicators (Current Account in surplus, foreign reserves up — $2.8bn since May 2020), inflation falling to a 21-month low, continued pick-up in demand, strong domestic liquidity courtesy low interest rates, as well as a commodity up-cycle, should drive the performance in equities. Additionally, valuations are attractive not just relative to Pakistan’s own history, but also versus other markets.
2020 was a record-setting year in capital issuance, with a record Rs. 54 billion rupees capital raised through primary and secondary offerings. Four companies raised Rs. 8.4 billion via Initial Public Offerings (IPOs), while a massive Rs. 45.2 billion was raised through secondary offerings (i.e. right issuance). The recent trend is expected to continue in 2021, with at least six new companies slated to raise capital through IPOs, while the demand for secondary offerings remains strong.
From a macro standpoint, taming inflationary pressures will be one of the top challenges that the authorities will continue to contend with in the short-term. Utility adjustments to stop bleeding in the energy chain, commodity up-cycle, and potential fiscal adjustments are the key upside risks, which would make it incredibly challenging for the authorities to control inflation.
Over the medium-term, challenges revolve around structural macro issues, with a fragile fiscal position and energy chain issues being the key ones. On the fiscal side, even achieving overly ambitious full-year targets would still leave a massive fiscal deficit of 7.0 percent of GDP, which means the government has a long way to go before bringing it down to a manageable level. The energy sector is beset with its own unique and difficult-to-address challenges, with currently applicable tariffs significantly below break-even level. Tariff renegotiation with Independent Power Producers complemented by tariff adjustments are steps in the right direction, but there is still a long way to go.
COVID-19 wreaked both humanitarian and economic havoc across the globe. Pakistan, like every other country, was no exception. Besides the human toll, the outbreak has caused severe economic pain, with various official and international lending agencies’ estimates suggesting an economic loss in the range of Rs. 1.6-2.5 trillion to Pakistan’s economy.
However, the government’s response was broadly effective, both in terms of containing the virus’ spread via smart lockdowns and minimising the economic damage through timely policy responses in the form of the stimulus package (Rs. 1.2 trillion), reduction in interest rates, deferment of loan repayments (Rs. 657 billion), and restructuring of loans (Rs. 222 billion).
The government’s policies have anchored a relatively swift economic recovery across major sectors of the real economy — relative to our peer group regional countries — including recovery from real estate and construction into allied sectors such as cement, steel, auto, manufacturing, and pharmaceuticals. This is a combination of macro and micro-level policy responses from government institutions, such as a the timely response from Pakistan’s central bank to reduce interest rates with the introduction of the Temporary Economic Refinance Facility (TERF) to promote the setting up of new industrial units. These are complemented by the Stimulus Package of Rs. 2.3 trillion.
At the same time, various measures that are currently being undertaken will long serve in addressing Pakistan’s chronic structural imbalances, such as a shift to a market-determined exchange rate regime to measures in improving formal channel reserves, improving access for Pakistani expats to the country’s capital markets via the Roshan Digital Account, as well as digitising the onboarding of clients with capital market institutions.