Fiscal Year 2020 ANNUAL · of imports constitute raw materials, which are used to produce final goods. Remittances expected to drop by $5 billion during FY20-21, amid shutdowns and

1

ECONOMIC REPORT

Fiscal Year 2020

ANNUAL

2

ECONOMIC REPORT Fiscal Year 2020

FY20 – All economic targets

missed

The latest Economic Survey 2019-20

reflected that Pakistan has missed all major

economic targets, majorly owed to the havoc

created by Covid-19. Per the adviser to

Prime Minister, Pakistan faced an economic

loss of up to PKR 3 trillion because of the

COVID-19 pandemic in the current fiscal

year. GDP growth, exports, fiscal deficit,

revenue generation, inflation and other key

indicators were all, well off the mark. The

only respite came due to a contraction of

current deficit due to lower imports. GDP

contracted by 1.5% against an ambitious

target of 3.0%. Growth of agricultural sector

is 2.67% as compared to the target of 3.5%.

Industrial sector’s growth has shrunk by

2.64% as against the target of 2.4%. Growth

of services sector has also contracted by

0.6% as compared to projection of 4.8%.

Manufacturing contracted by 22.9% year-on-

year in March 2020.

FY20 – Taking the brunt of

stabilization measures

Before the policy adjustments and structural

reforms, the economy was suffering from

low tax to GDP ratio, poor savings rate,

minimal export growth with negligible value

addition, loose monetary policy and

overvalued exchange rate which made it

difficult to control twin deficits; the fiscal and

the current account. This, in the short term,

fueled demand and short-term growth, but

gradually eroded macroeconomic buffers,

increased public debt and depleted

international reserves. The stabilization

measures resulted in economic slowdown,

rising inflation, low pace of job opportunities

and negative impact on the lowest income

groups of the society. The most prominent

effect of these measures was seen on the

Pakistan Stock Exchange (PSX), which went

down to 29,672 points in August 2019 and

posted a negative return of 13.78% (minus

17.22% in dollar terms) in the first nine

months of FY20.

FY20 – Success results

prior to Covid-19

Prior to the Covid-19 shock, external

imbalances had been significantly reduced

and the economy was poised to strengthen

due to strong policy and reform efforts.

Growth was projected at 2.4% in FY 2020,

accelerating to 3% in FY 2021. The current

account deficit (CAD) was expected to

narrow to 2.2% of GDP from 4.9% of GDP

the previous year, with reserves topping

US$12.5 billion (2.5 months of imports). The

current account posted a surplus in October

2019 for the first time in 4 years. Inflation,

which had been hit by a series of temporary

food price shocks, was expected to

gradually return towards the State Bank of

Pakistan’s (SBP) forecast range of 11–12%

and to reach the 7% inflation objective by

late FY 2021. The fiscal performance was

strong until December 2019, with a primary

surplus of 0.7% of GDP and public debt at

84% of GDP. The banking system remained

broadly sound, with system-wide capital

adequacy ratio at 17% in December 2019

and the non-performance loan (NPL) ratio at

8.6%, with the bulk of NPLs provisioned

(81.4%). Moreover, improved ranking in

World Bank’s ease of doing business index,

and ‘Stable’’ credit outlook to B3 from

‘Negative’ by Moody’s.

EY analysis

+- -

All is not lost – “Road to recovery”

The recent locusts attack has made a major

dent on the agricultural sector. Agriculture

was the only positive contributor to GDP in

FY20 and reduction in its growth is

worrisome.

However, due to Covid-19, inflation declined

rapidly. It allowed SBP to make 4

consecutive rate cuts, bringing the key

interest rate from a high of 13.25% to 8.00%

in just a span of 2 months. The lower

interest rates benefits the growth of large

scale manufacturing sector and may boost

aggregate demand and drive consumption.

As Pakistan has already absorbed the

higher electricity and commodity prices, the

rising inflation does not pose an immediate

threat to growth prospects. Assuming the

interest rates stay low, the economic activity

will resume to a higher level and the growth

prospects will return to being positive.

During FY20, the current account deficit

contracted to a six-year low, foreign

exchange reserves increased, the primary

budget recorded a surplus, and core inflation

eased. Importantly, export-based

manufacturing showed signs of traction and

construction activities picked up, indicating

that the economy was on the path to

recovery. Progress under the IMF program

remained on track and the credit rating

agencies maintained their stable outlook for

Pakistan during the review period and

further improvements would require deep

structural reforms to put the economy on a

firm path towards sustainable growth.

Lower interest rates on loans will also

improve borrowers’ repayment capacity.

However, the lower rates will reduce net

interest margins and diminish banks’

earnings. The SBP has offered cash-flow

relief through loan refinancing schemes and

loan payment holidays to borrowers such as

exporters and manufacturers affected by

disruptions caused the coronavirus

outbreak. The expected gradual recovery in

economic activities would help the national

economy to grow by more than 2% in fiscal

2021.

Solutions to Pakistan's problems and

frequent boom bust cycles have been

evident for a while. It is clear that despite

serious challenges, Pakistan can hope of a

better economy in few months. The next

fiscal year will set the tone for it.

3


Sources: ADB, IMF, PIDE, BR

Coronavirus disease (COVID-19) - Heading towards a recession?

IMF forecasted macroeconomic indicators:

Indicators FY2020 FY2021

GDP growth

(%)(1.5) 2.0

CAD (% of

GDP)1.7 2.4

Fiscal deficit

(% of GDP)9.2 6.5

Unemployment

ratio (%)4.5 5.1

Inflation rate

(%)11.1 8.0

►The official assessments estimate an initial loss of PKR 3 trillion

(around $15 billion) to the economy.

►The disease could result into unemployment ranging from 12.5 to

15.5 million people in the case of moderate slow down and 18.7

million people to 19.1 million in case of severe restrictions.

►A condensed income for a vast part of the population will result in

shrinking the tax base. Tax collection which was growing at the rate

above 17 percent during July-February, FY2020 has witnessed a

significant decline. After the outbreak of COVID-19 pandemic, an

average negative growth rate of 13.4 percent was recorded during

March 2020 and April 2020 as compared to last year.

►It is expected that there will be an increase in expenses due to the

relief packages and therefore budget deficit is expected to exceed the

target of 7.5 percent of GDP and may go up to 9.4 percent of GDP.

►The Ministry of Commerce has estimated that the exports losses

may be as significant as USD 4 billion. Imports are expected to

decline which will disrupt the supply chain of multiple industries as 68%

of imports constitute raw materials, which are used to produce final

goods.

►Remittances expected to drop by $5 billion during FY20-21, amid

shutdowns and reduced activities in major countries, including GCC.

►Healthcare facilities are insufficient to meet the populations need,

creating social vulnerabilities. On average there is only 1 bed available

for over 1680 people.

Fighting the invisible enemy : Policy responses by the government

Fiscal policy

► A relief package worth PKR 1.24 trillion has been

announced by the federal government. Following are the

key features:

• elimination of import duties on emergency health

equipment,

• relief to daily wage workers (PKR 200 billion),

• cash transfers to low-income families (PKR 150

billion),

• accelerated tax refunds to the export industry (PKR

100 billion),

• financial support to SMEs (PKR 100 billion),

• accelerated procurement of wheat (PKR 280 billion),

• financial support to utility stores (PKR 50 billion),

• relief in fuel prices (PKR 70 billion),

• support for health and food supplies (PKR 15 billion),

• electricity bill payments relief (PKR 110 billion),

• an emergency contingency fund (PKR 100 billion),

• a transfer to the National Disaster Management

Authority (NDMA) for the purchase of necessary

equipment to deal with the pandemic (PKR 25 billion).

Monetary & Macro-Financial policy

► SBP has responded to the crisis by cutting the policy rate

three times by a cumulative 525 basis points to 8.0% in the

span of two months.

► SBP has introduced 3 refinancing facilities for:

• supporting hospitals and medical centers to purchase

equipment to detect, contain, and treat COVID-19,

• stimulating investment in new manufacturing plants

and machinery,

• incentivizing businesses to avoid laying off their

workers during the pandemic.

► SBP introduced temporary regulatory measures to

maintain banking system soundness and sustain economic

activity. These include:

• reducing the capital conservation buffer by 100 basis

points to 1.5%,

• incentivizing businesses to avoid laying off their

workers during the pandemic,

• increase the regulatory limit on extension of credit to

SMEs by 44% to PKR 180 million,

• relaxation of the debt burden ratio for consumer loans

from 50% to 60%,

• allowing banks to defer clients’ payment of principal

on loan obligations by one year.

4


Parameter FY15A FY16A FY17A FY18A FY19A10M

FY20AFY20 FY21

GDP (US$

Bn)271 279 305 313 283 N/A 264 NA

GDP

Growth in

PKR terms

(%)

4.1 4.6 5.2 5.5 3.3 N/A (1.5) 2.0

GDP per

capita (US$)1,514 1,529 1,630 1,652 1,455 N/A 1,355 NA

CPI** (%) 4.5 2.9 4.8 4.7 6.8 11.2 11.1 8.0

Imports

(US$ Bn)41.4 41.1 48.0 55.7 52.0 36.1 N/A N/A

Exports

(US$ Bn)24.1 22.0 22.0 24.8 24.3 19.7 N/A N/A

Fiscal*

Deficit (%

of GDP)

5.3 4.4 5.8 6.4 8.8 **3.8 9.2 6.5

CAD (US$

Bn)-2.82 -4.96 -12.27 -19.20 -13.43 -3.34 NA NA

CAD* (% of

GDP)1.0 1.7 4.1 6.3 4.8 N/A 1.7 2.4

SBP Forex

(US$ Bn)13.5 18.1 16.1 9.8 7.3 10.4 N/A N/A

Source: SBP, IMF, PBS, World Bank, ADB

*The forecasted inflation rate, fiscal deficit and CAD for FY20 is from IMF.

**The average is of 9 months from Jul-Mar

A: Actual P: Provisional F: Forecast

Key Economic Indicators

5


ECONOMIC SN/APSHOT

8.4%10.5%

11.4%11.0%12.7%12.6%

14.6%

12.4%

10.2%8.5% 8.2%

Inflation (Year-on-Year)

11%Average CPI

(July-May)

Trade deficit Current account deficit Policy rate

8.00%

The State Bank of

Pakistan (SBP), has

further decreased

the policy rate by

100bps since April

to 8.00% effective

20thh May 2020.

Remittances Foreign Exchange Reserves

~19.1 bnUSD

July-April FY20

~18.8 bnUSD

14.9 15.0

17.4

15.7 14.9 14.5

15.1 15.6 15.2 15.4 16.0

17.9 18.7 18.9

17.0 18.4

16.9

Ja

n-1

9

Feb

-19

Mar-

19

Apr-

19

May-1

9

Ju

n-1

9

Ju

l-19

Aug

-19

Sep

-19

Oct-

19

No

v-1

9

De

c-1

9

Ja

n-2

0

Feb

-20

Mar-

20

Apr-

20

May-2

0

~16.9 bnUSDMay 2020

SOCIAL INDICATORS

212 MillionPopulation

Urban Rural

36%

64%

Life Expectancy66 years

Literacy rate(%age of adult

population)

60%

PKR 14,000 to

15,000 per month(Minimum wage rate

24.3%Current poverty rate

GDP$ ~264bn

GDP per capita – USD1,355 p.a.

FY20

~10.4 bnUSDWith SBP

~3.34 bnUSD

July-April FY20

Jul-April FY20

~27.2bnUSD

July-April FY19

~11.45 bnUSD

July-April FY19

~17.8 bnUSD

July-April FY19

6


1.0 GROSS DOMESTIC PRODUCT

Current situation:

► Pre Covid19, FY20 was looking better than FY19 for Pakistan's

economy. Governments efforts of addressing structural issues

causing macroeconomic imbalances were bearing fruit.

Business confidence in Pakistan's economy improved and the

twin deficits were being tamed.

► Country saw a higher FDI inflow, and green shoots of recovery

were emerging in the export sectors. While the quantum of

exports in dollar terms didn’t increase significantly, the export

based diversified and market share of exporters was increasing.

► IMF was of the view that this would lead to economic recovery,

putting Pakistan on the track for sustainable growth.

► However, due to the Coronavirus outbreak, the outlook of the

economy changed. The growth which was projected at 2.4% for

FY20 and 3% for FY21 was revised downwards. IMF predicts

the economic growth for FY20 to slow down to -1.5%,, before

recovering to 2.0% in FY21.

► Pakistan’s economy is largely consumption driven and due to

the pandemic many industries which rely on consumer spend

both in manufacturing and services segments have been

impacted.

► Other challenges facing the economy include, significant

infrastructure deficit, savings-investment gap, geo-political

uncertainties and potential conflict with India and increasing cost

of inputs for manufacturers (electricity, raw materials etc) which

impact competitiveness.

► Key segments of the economy are discussed in detail below:

Gro

ss D

om

esti

c P

rod

uc

t

Sources: SBP, IMF, World Bank

GDP composition:

The sectoral employment shares change littleregardless of whether the economic growth ishigh (as in 2005) or low (as in 2008 or 2010).

GDP per capita (2000-2020):

(Thousands of nominal US dollars)

Pakistan continues to lag regional peers andother EMs in economic convergence.

• Agricultural sector: During FY20, the agriculture sectors

performance has improved over the last year and has

performed better than other sectors. It grew by 2.67%

compared to 0.58% last year. The crops sector has witnessed

positive growth of 2.98% during FY20 against a negative

growth of 4.96% during FY19. This is mainly due to positive

growth (2.90% in FY20 vs -7.68% in FY19) in important crops

due to sufficient availability of inputs such as water, seeds and

pesticides.

• Industrial sector: During FY20 the provisional growth in

industrial sector has been estimated at -2.64% as compared

to -2.27% growth in FY19. This is mainly because of decline in

growth to -5.4% (-2.34% growth in FY19) in large scale

manufacturing sector while mining and quarrying sector has

witnessed a negative growth of 8.82% (-3.19% growth in

FY19).

• Services sector: Provisional estimates indicate that the

services sector posted a negative growth of 0.6% during FY20

against growth of 3.80% in FY19. Wholesale and Retail Trade

sector grew at a rate of -3.4% in FY20 versus a growth of

3.2% in FY19. Transport, Storage and Communication sector

grew by 12.31% against growth of 13.20% achieved in FY19.

5.2 5.5

3.3

-1.5

2.0

Pakistan’s economic growth will contract by1.5% in FY20: IMF

GDP growth (%):

0

5

10

15

2000 2004 2008 2012 2016 2020

Turkey

Colombia

Pakistan

South Asia Avg (exc PK)

19%

20%61%

Agriculture Industrial Services

7


Gro

ss D

om

esti

c P

rod

uc

t1.0 GROSS DOMESTIC PRODUCT (CONT’D)

Current situation (Cont’d):

► A graph showing the historical growth rates of the three sectors

is presented on the right.

► Macroeconomic adjustments in Pakistan, including a

continuation fiscal consolidation, is expected to continue.

► These adjustments also include cuts in public sector

development expenditures, and enhanced focus on higher tax

collections.

Outlook:

► Agriculture is expected to see slow growth as the worst locust

infestation in over 2 decades damages harvests of cotton,

wheat, and other major crops. The government has declared a

national emergency to combat the infestation.

► Modest growth is expected in some export-oriented industries

such as textiles and leather.

► Large-scale manufacturing may stabilize and its growth

prospects will improve. Due to unforeseen decline in inflation

and interest rates, consumer demand may increase and spur

LSM growth.

► Growth is expected to improve in FY2021, driven by a rebound

in domestic investment due to reduction in discount rate.

► Pakistan is also poised to benefit from a rebalancing of the

global supply chain and diversification of manufacturing from

China. Second phase of CPEC offers these opportunities.

► Progress on transforming Pakistan into a transit route for

Chinese products under the CPEC framework continues. ML-1

a key strategic CPEC project has been approved and once

completed will enhance Pakistan’s transit capabilities.

Ease of doing business index: The World Bank’s current

Ease of Doing Business score for Pakistan (61.0) places the

country on 108th position in the world. Pakistan has advanced

28 places this year on the DB ranking. In Ease of Doing

Business 2020, Pakistan is in the list of top 10 improvers. The

top 10 improvers list also includes China, India and Saudi

Arabia. Although, Pakistan ranks higher than the regional

average of 58.2, it is still trailing behind China and India.

Pakistan’s improvement is mainly owed to an ambitious reform

strategy, setting up a national secretariat and prime minister’s

reform steering committee to ensure progress. All of these

reforms were in line with the Doing Business indicators.

The largest change in score was observed in getting electricity

as the country enforced service delivery time frames and by

launching an online portal for new applications. Pakistan also

increased the transparency of electricity tariff changes.

Moreover, Pakistan made paying taxes easier by introducing

online payment modules.

TopicsChange in score

(% points)

Overall +5.5

Starting a Business +7.4

Dealing with

construction permits+14.6

Getting electricity +20.9

Registering property +5.8

Getting Credit -

Protecting minority

investors-

Paying taxes +5.9

Trading across

Borders+1.3

Enforcing Contracts -

Resolving insolvency -0.9

100

0

77.9: China (Rank 31)

71.0: India (Rank 63)

58.2: Regional average

61.0: Pakistan (Rank 108)

45.0: Bangladesh (Rank 168)

Sectoral growth:

World Bank DB ranking:

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

Agriculture Sector Industrial Sector

Service Sector

8


Deficit (USD bn):

Sources: BR, PBS, SBP, World Bank

Imports by commodities (USD mn):

CA

D

2.0 CURRENT ACCOUNT DEFICIT

► During the first ten-months of the year Current Account Deficit

(CAD) declined by 70% to $3.3 billion (1.5% of GDP).

► CAD is expected to reach $4 billion for FY20 which is in stark

contrast to $ 13.4 billion in FY19.

► Decline in CAD is largely on account of reduction in trade

deficit. Within this category imports declined rather sharply.

Total merchandise exports registered a decline of 17%

declining to $ 36 billion (FY19: $ 43.4 billion).

► Within imports, major decline was witnessed in Petroleum

products. A combination of reduced economic activity and lower

oil prices aided in this reduction. Petroleum product imports in

first ten months of the year were $8.4 billion (FY19: 11.9 billion)

reflecting a decline of ~ 30%.

► In terms of quantum, this was followed by a decline of $ 1.2

billion in Agriculture and other chemical products. Highest

percentage reduction was witnessed in Transport category

(lower vehicle imports).

► Export growth was lackluster prior to the pandemic. However,

in April exports declined by 24% Month on Month, moving in

tandem with the reduction in textile exports of 25%.

► Hence, exports of goods declined slightly from $20.1 Billion in

10mFY19 to $ 19.65 billion in 10mFY20 a decline of 2%.

Outlook

► Export growth will depend on recovery in Pakistan’s primary

markets including US. Due to social distancing and lockdowns

in many countries, demand for Pakistan’s major export group

i.e. Textiles may not pick up significantly.

► The export houses are however, attempting to diversify their

product portfolios. Personal Protective equipment, masks and

even sanitizers are being exported.

► On import side, lower demand of oil products and lower prices

are expected to keep the numbers low. Further, due to

contraction in consumer spending, other import categories may

likely see some contraction.

► In addition, import of services is also likely to register a further

decline as people travel less.

► The government remains optimistic that its policies will curb the

menace of the persistent CAD. However, on the fiscal side due

to the high deficits, a feedback loop may emerge which pushes

the CAD higher.

► The government accordingly envisages a modest 1.5% and

1.1% increase in exports and imports respectively for FY21. It

is targeting a CAD of 1.6% of GDP. Lower CAD is expected to

keep Pakistan’s credit rating stable and lay a foundation for

growth in subsequent years.

2,0

63

13

,30

8

3,3

11

3,3

08

5,3

36

2,0

27

9,6

26

2,8

95

2,7

57

4,9

88

Ve

ge

table

Pro

du

cts

Min

era

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ucts

Te

xtile

s a

nd T

extile

Art

icle

s

Ba

se

Me

tals

an

d A

rtic

les

or

Base M

eta

l

Ma

chin

ery

an

dM

echa

nic

al A

pp

liance

s

10M FY19 10M FY20

Exports by commodities (USD mn):

2,7

62

1,0

55

11

,43

2

49

3

14

0 2,7

79

88

7

11

,08

5

53

0

12

9

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ge

table

Pro

du

cts

Min

era

l P

rod

ucts

Te

xtile

s a

nd T

extile

Art

icle

s

Ba

se

Me

tals

an

d A

rtic

les

or

Base M

eta

l

Ma

chin

ery

an

dM

echa

nic

al A

pp

liance

s10M FY19 10M FY20

+1%

52.4

43.4

0

10

20

30

40

50

60

10M FY19 10M FY20

0

20

40

60

80

100

120

Balance of trade Imports Exports

24.3

19.1

27.2

25.2

-16%

-3%

-8%8%

-2%

-28%

-13% -17%-7%

9

In light of the coronavirus outbreak, the MPC emphasized that it stood ready to take further actions if and when needed as more information becomes available on the outlook for inflation and growth. -SBP

“

”


Infl

ati

on

& M

PS

Average Annual CPI

4.8% 4.7%6.8%

11.0%

FY17 FY18 FY19 FY20*

The increase in prices will be driven byexchange-rate pass-through to domestic prices

* Average CPI for FY20 is of Jul- May

Policy rate (Jan 2019 - May 2020):

The State Bank of Pakistan cut the policy rateby 75bps to 12.5% on 17th March 2020, afurther cut of 150 bps to 11.0% on 24th March2020 followed by a further cut of 200 bps to

9.0% effective 16th April 2020 after which itwas cut 100 bps to 8.00% effective 15th

May 2020

Monthly Y-on-Y CPI:

Source: SBP

0%2%3%5%6%8%9%

11%12%14%15%17%

Ma

r-19

Ap

r-19

Ma

y-1

9

Jun

-19

Jul-1

9

Au

g-1

9

Se

p-1

9

Oct-

19

Nov-1

9

Dec-1

9

Jan

-20

Fe

b-2

0

Ma

r-20

Ap

r-20

Ma

y-2

0

Urban Rural National

10.00%

10.75%

12.25%13.25%

12.50%

11.00%

9.00%

Jan

-19

Fe

b-1

9

Ma

r-19

Ap

r-19

Ma

y-1

9

Jun

-19

Jul-1

9

Au

g-1

9

Se

p-1

9

Oct-

19

Nov-1

9

Dec-1

9

Jan

-20

Fe

b-2

0

Ma

r-20

Ap

r-20

Ma

y-2

0

8.00%

0%

5%

10%

15%

20%

25%

Jul-1

9

Au

g-1

9

Se

p-1

9

Oct-

19

Nov-1

9

Dec-1

9

Jan

-20

Feb-2

0

Mar-

20

Ap

r-20

Ma

y-2

0

Food Non food

Monthly Y-on-Y food non-food CPI:

3.0 INFLATION & MONETARY POLICY

Inflationary pressure:

► Inflation pressures built during the first half of FY20. Although

non food inflation was stable, food inflation surged during FY20.

► A 12-year high was recorded in January 2020 as the CPI rose

on a year by year basis by 14.6%. This can be attributed to a

surge in food inflation due to the shortage of flour and sugar.

► The MPC noted that recent outturns in essential food prices

reinforced their assessment that the earlier shocks were

transitory and that the underlying trend in headline inflation

would remain moderate in the remaining part of the fiscal year,

projecting average headline inflation to be 11-12%.

► The inflation has reduced in the light of the recent cut in the

domestic fuel prices and seems to have stabilized in the last

couple of months, as it stands at 8.2% in May 20.

► The inflation could fall further than expected if economic activity

fails to pick up. However, price pressures could also emerge if

the economy gains greater momentum in FY21.

Monetary Policy May, 2020:

► Key developments – The outbreak of the Coronavirus has

taken a significant toll on human life around the world. At the

same time, global oil prices have plummeted, in response to

which the government has reduced petrol and diesel prices by

30-40% which has helped lower domestic inflation and improve

the current account. Heightened global risk aversion initially

reduced demand for emerging market assets across the world,

leading to some volatility and depreciation in the domestic

foreign exchange market. However, due to timely policy actions

and international assistance the initial volatility observed has

somewhat subsided in recent weeks.

► External sector – The contraction of the current account deficit

has continued even though both exports and imports have

fallen since the coronavirus outbreak. Pakistan’s exports have

declined by 54% and imports by 32% on a year on year basis in

April. The outlook for the external sector remains broadly stable

despite the challenging global conditions. The recent fall in

portfolio inflows will be offset by official flows committed by the

international community, which will support a steady build up in

SBP’s foreign exchange reserve buffers.

► Monetary and inflation outlook – Weak economic activity

continues to be a drag on private sector credit, which expanded

at 3.6% during 1st July to 6th March FY20, less than half the rate

seen during the same period last year. There has been a

significant reduction in inflation since the surge in January 20,

due to the cut in the domestic fuel prices coupled with

substantial cuts in the policy rate.

10

4.0 CURRENCY

PKR/Dollar:

► Pakistan rupee largely avoided the shockwaves which hit the

developing economies as a result of global market selloff amid

the pandemic.

► After the coronavirus crisis, capital flight from risky assets

triggered currency depreciation in most of the emerging

markets. Rupee experienced a 3.3 percent slide against the US

dollar. However, this decline was lower compared to other

emerging market currencies.

► Global capital flights to safety have caused substantial outflows

from the emerging markets including Pakistan.

► When the interest rates peaked and foreign currency supply

(through hot money, local conversion and loans from

multilaterals) improved, the currency started appreciating and

reached from its low of Rs164/USD (Jul19) to Rs155.7/USD in

Nov 19. Till that time hot money inflow was mere $454 million.

► The real flows started coming in Nov-19 and by Feb-20 the

amount peaked at $3.2 billion. SBP took the opportunity to build

up its reserves and slash its off balance sheet liabilities.

Outlook:

► SBP has made it difficult to buy dollars in open market now and

SBP may intervene to anchor expectations.

► Economists said that the global markets are witnessing

disintegration due to COVID-19 panic and foreign investors are

offloading their portfolios irrespective of asset class of

geography as dollar seems the most secured investment.

► Currency devaluation is inevitable because of several reasons

including expected increased CAD (in the long term after the

COVID-19 dust settles), debt servicing, and lower FDI.


PKR/USD (month end value):

Sources: SBP, BR

Cu

rre

ncy

Avg NEER (May 2019 – April 2020):

It is forecasted that the Rupee will furtherdepreciate in the coming days, due to macroeconomic factors, instability and COVID-19.

148.5

164.5

160.3

157.6

156.7

156.2

155.7

155.4

154.9

154.7

166.8

162.2

162.4

Ma

y-1

9

Jun

-19

Jul-1

9

Au

g-1

9

Se

p-1

9

Oct-

19

Nov-1

9

Dec-1

9

Jan

-20

Fe

b-2

0

Ma

r-20

Ap

r-20

Ma

y-2

0

66.9

0

62.8

9

60.7

3

62.0

6

63.0

8

63.0

3

62.9

4

63.0

1

62.7

9

63.6

9 62.4

8 61.1

6

97.0

0

90.9

8

89.7

4

92.6

8

94.3

6

94.8

1

95.7

9

95.7

2

96.4

6

97.2

0

97.1

5 95.7

1

Avg REER (May 2019 – April 2020):

The Circular Debt – Restructuring IPPs

The growing capacity payments and build-up of energy circular

debt is by far the biggest economic worry the country has in

the medium to long term. The capacity payment per annum

was around Rs280 billion in 2016, and it is around Rs900

billion in 2020 and would reach Rs1,500-1,600 billion by 2024

in today's PKR/USD value.

There are two ways to dilute capacity charge per unit, one is by

increasing consumption of units and other is to lower the

capacity payment by negotiations with IPPs' debtors to discuss

foreign currency indexation, rescheduling the debt, O&M costs

and other factors. Now with COVID, the consumption will fall

further.

The only way to sustain is to revisit the contracts, restructure

the repayments and other anomalies. Otherwise, sooner or

later the country will default on its sovereign commitments to

these IPPs. The starting point for the government should be to

restructure its own IPPs, followed by CPEC. Once these all are

restructured, private sector negotiation could be much easier.

Hence, the debt restructuring of the IPPs will ease the circular

debt of Pakistan. -Business Recorder

11


Net FDI (USD mn):

Sources: SBP, PBS, BR, EY analysis

Fo

reig

n D

ire

ct

Inve

stm

en

t

Net FDI by Countries (USD mn):

An inconsistent trend can be noted withrespect to the Net FDI in Pakistan.

147.0

29.7

159.7

75.5

163.5

14.0

100.9

87.4

Hongkong

Sin

ga

pore

United K

ingdom

United S

tate

s

FY19 (July-April) FY20 (July-April)

Total foreign investments (USD mn):

45.4

877.8

C

hin

a

115

146

102

230

130

72

91

384

108

200

487

223

289 279

133

Fe

b-1

9

Ma

r-1

9

Ap

r-19

Ma

y-1

9

Jun

-19

Jul-

19

Au

g-1

9

Se

p-1

9

Oct-

19

No

v-1

9

De

c-1

9

Jan

-20

Fe

b-2

0

Ma

r-2

0

Ap

r-20

Net FDI

2,878

2,064 2,156

4,990

(55)

1,864

FY15 FY16 FY17 FY18 FY19 FY20*

5.0 FOREIGN DIRECT INVESTMENT (FDI)

Current situation:

► Despite Covid-19 pandemic, Foreign Direct Investment (FDI)

continued its rising trend in Pakistan and posted a healthy

growth of 127% during the first 10 months of current fiscal year

(FY20).

► Pakistan attracted FDI amounting to $2.281 billion during July-

April of FY20 compared to $1.006 billion in the corresponding

period last fiscal year, showing an increase of $1.275 billion.

During the first 10 months of FY20, FDI inflows were $2.872

billion against outflow of $590 million.

► Foreign investment in the country is also showing an upward

trend on month-on-month basis. FDI surged by 32% to $133

million in April 2020 versus $101 million in April 2019. During

the April FDI inflows were $175 million as against outflow of

$42 million.

► Country-wise analysis shows that China contributed 38% share

in overall investment. China is the largest investing country with

an investment of $877 million during the first nine months of this

fiscal year compared to $40 million in same period of last fiscal

year.

► Norway stood second with an investment of $288 million mainly

in telecommunication sector. While, Hong Kong ranked third

with investment inflows of $189 million.

► Total foreign investment including FDI, portfolio investment and

foreign public investment was $1.864 billion in July-April of

FY20 compared to negative $402 million in same period of

FY19.

► The news of lower policy rate cut discouraged investors to stop

investing in government paper. Between March 1 and March 11

2020, markets saw a net outflow of $600 million plus from T-

bills.

► Foreign investors sold $16 million worth of treasury bills (T-

bills) on May 21, according to the latest data from the State

Bank of Pakistan (SBP), bringing the net divestment figure of

May so far to $182 million.

Outlook:

► In the early days of the Covid pandemic, UN Conference on

Trade and Development has recently estimated that global FDI

flows would fall at least by 5% in FY20 and 15% in FY21. About

a month later, it revised those estimates downward to 30% -

40% respectively on account of falling earnings of the MNCs

among other factors.

► The real impact of Covid-19 on FDI in Pakistan will become

clearer in the next fiscal year.

► Businesses relying on discretionary consumer spend will face

difficulties in attracting investment. These include banks and

conventional FIs, airline, tourism, auto, food and beverage.

* FY20 is of 10 months from July-April

Reforms are needed to be prioritized to attract and sustain higher Foreign Direct Investment (FDI) inflows into the country.

“ “

- SBP

12


Annual Remittances (USD mn):

Sources: SBP, BR

Annual remittance growth (%):

Re

mit

tan

ces

6.0 REMITTANCES

Current:

► Home remittances sent by overseas Pakistanis posted a growth

of 5.5 percent during the first 10 months of this fiscal year

(FY20).

► Overseas Pakistani workers have remitted $18.782 billion in

July to April of FY20 against the inflows of $17.801 billion

arrived during the same period in the preceding year (FY19),

recording an increase of $ 980.6 million.

► Home remittances from Saudi Arabia and US increased by

approximately 5% and 21.27%, respectively.

► Pakistan received inflows of $4.377 billion from Saudi Arabia

and approximately $3.382 billion from US during the first ten

months of this fiscal year. While, inflows of home remittances

from UK surged by 1% to $2.781 billion.

► Month on Month basis, during April 2020, the inflows of

workers' remittances were amounted to $1.79 billion as against

$1.894 billion inflows of March 2020, depicting a slight decline

of 5.5% or $104 million.

► However, the remittances during April 2020 increased by $19.8

million or 1.1% over remittance received during corresponding

month of FY19. This could be attributed to Ramadan

(charity/zakat inflows).

► The highest growth in remittances over this 9 month period

came from Japan at 59.19%. Pakistanis sent $21.46mn

compared to $13.48mn in the same period last year.

Outlook:

► With job losses in key remittance markets of Pakistan (GCC

countries, US and UK) the overall remittance numbers are likely

to reduce going forward.

► GCC countries are facing the double whammy of lower oil

prices and covid related demand contraction. This would further

reduce the employment opportunities for Pakistanis.

Country-wise remittances (%) 10MFY20:

19,914

21,739

18,782

FY18 FY19 FY20*

12m

* FY20 is of 10 months from July-April

6.40%

-2.80%

2.90%

9.17%

FY16 FY17 FY18 FY19

US, 17%

UK, 15%

Saudi Arabia,

23%

UAE, 21%

Other GCC countires ,

9%

EU counties , 3%

Malaysia, 7%

Australia, 1%

Canada, 1%

Others Countries, 3%

2,0

28

1,6

81

1,7

37

2,0

01

1,8

20

2,0

97

1,9

08

1,8

25

1,8

94

1,7

90

Jul Aug Sept Oct Nov Dec Jan Feb Mar Apr

Remittances July-April (USD mn):

13


KS

E-1

00

7.0 KSE-100 index

► The Pakistani Stock Market’s benchmark KSE-100 Index has been very volatile, yielding a negative

return of 13.78% from July-March. During this period a total of Rs1.3 trillion have been wiped off the

market capitalization.

► This downfall is mainly because of withdrawal of foreign investors from the market due to the following

factors:

► Negative outlook of the global economy due to plunge in oil prices and the Coronavirus

outbreak;

► Reduction in returns due to currency devaluation;

► Even globally, foreign investors are pulling out from commodities and stocks markets and looking for

safer avenues of investment including governments’ debt instruments.

► However, if we calculate from July of the previous year to date June, the market has managed to recoup

all the losses and yield a positive return of 3.62%.

► The PSX has also outperformed the MSCI Emerging Market index which fell 19.61% during July-March.

40,799

39,054

38,649

36,784

35,974

33,901

31,938

29,672

32,078

34,204

39,288

40,735

41,630

37,983

29,231

34,111 33,931

Jan

-19

Feb

-19

Ma

r-19

Apr-

19

Ma

y-1

9

Jun

-19

Jul-

19

Aug-1

9

Sep-1

9

Oct-

19

No

v-1

9

Dec-1

9

Jan

-20

Feb

-20

Ma

r-20

Apr-

20

Ma

y-2

0

14


Re

ce

nt

deve

lop

me

nts

DEVELOPMENTS SHAPING THE ECONOMY

This will help Pakistan to reduce economic vulnerabilities and

generate sustainable and balanced growth focusing on a

fiscal consolidation to reduce public debt and build resilience

while expanding social spending.

“IMF Executive Board Approves US$6 billion

39-Month EFF Arrangement for Pakistan”July2019

Since 29% of Pakistan's imports are oil price driven,

Pakistan's import bill would see a reduction therefore having

a positive effect on the current account balance.

Mar2020

Pakistan's current account posted a surplus due to a

reduction in imports, better exports and firm worker

remittances. The reduction in imports was due to structural

reforms like rupee depreciation, duty on imports and a high

benchmark lending rate.

“Current Account Surplus of USD$99 million

after 4 years”Oct2019

The expressway will provide speedy access to travelers,

thereby reducing the current time it takes to commute to only

25 minutes. It will facilitate thousands of commuters and the

heavy traffic across Karachi.

“Bids for Malir Expressway, the largest PPP

project in Sindh, solicited”

Pakistan declared a national emergency over the locust

swarms putting millions of hectares of crops in danger. The

government claimed this was the worst locust infestation in

over two decades.

“Locust attack threatens food security in

Pakistan”

Nov2019

Jan2020

Most of the country placed under partial lockdown

Closure of non-essential businesses and domestic supply

chain disruptions are having a significant impact on

manufacturing and service sector.

“Rapid Spread of Covid19 bringing the

economy to a halt”

“Decline in global oil prices by nearly 30%

since 1991”

Feb2020

15

ECONOMIC REPORT Jan-Mar 2020

“There can be economy only where there is efficiency.”

- Benjamin Disraeli

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Documents

Fiscal Year 2020 ANNUAL · of imports constitute raw materials, which are used to produce final goods. Remittances expected to drop by $5 billion during FY20-21, amid shutdowns and