The large-scale manufacturing (LSM) grew by 10.4 percent in the second quarter of the current fiscal year 2020-21, which is the highest quarterly LSM growth since Q4-FY07, according to the State Bank of Pakistan (SBP). The SBP released its Second Quarterly Report on the State of Pakistan’s Economy for the fiscal year 2020-21 on Thursday. The report highlights the strengthening of the economic recovery during the second quarter of the fiscal year, which was evident from the growing pace of industrial activity, the promising output of major Kharif crops (with the exception of cotton), and a pick-up in the services sector during the review period. The large-scale manufacturing (LSM) grew by 7.6 percent during H1-FY21, with its growth in the second quarter accelerating to 10.4 percent, the highest quarterly LSM growth since Q4-FY07. Construction-allied and food processing industries generated much of the momentum in industrial activity. The construction industry benefited from the favourable policy environment, which included the government’s fiscal incentives under the construction support package, the Naya Pakistan Housing Scheme, as well as financial measures from the State Bank. Within agriculture, most of the major Kharif crops performed better than last year; this improvement was attributed mainly to increases in their areas under cultivation. The government’s support package for Rabi crops, comprising subsidies on key inputs, and an increase in the support price for wheat, are likely to bolster the overall crop sector growth. However, cotton exerted a drag on the overall agricultural performance, as the revised production estimate of 7.7 million bales represented the lowest output since FY86. Nonetheless, due to the better output of other crops, the overall agriculture sector is expected to register positive growth. As the economic momentum picked up and the country successfully navigated the second wave of Covid without resorting to strict mobility restrictions, firms’ demand for credit nearly doubled on YoY basis during H1-FY21, said the report. In the external sector, the current account posted a surplus of US$ 1.1 billion during H1-FY21, driven by record-high workers’ remittances and reductions in the services and primary income deficits. Meanwhile, overall national CPI inflation fell to 8.6 percent during H1-FY21, from 11.1 percent in the same period last year. This outcome largely reflected the weakening in core inflation across both urban and rural areas, which was enabled by the presence of spare capacity in the economy, a reduction in energy prices and a relatively stable exchange rate during the period. On the fiscal side, tax collection was higher compared to last year, while non-interest expenditures declined, resulting in a primary surplus for H1-FY21. The fiscal deficit as a percent of GDP remained at a similar level as last year. Notwithstanding these positive developments, the report flags three areas that merit continuing vigilance by policymakers. First is the burden of debt servicing. Despite a relative improvement in revenue generation, the bulk of interest payments during H1-FY21 was financed via the issuance of new debt. Second, while national CPI inflation declined during H1-FY21 on a YoY basis, the prices of food items remain vulnerable to supply-side pressures in recent months. Third, with the domestic economic activity recovering and global commodity prices rising, import pressures are resurfacing. Moreover, these pressures have been accentuated by the domestic supply-side challenges for major agricultural commodities – cotton, sugar and wheat – which necessitated their imports. Finally, the report features a special section on the domestic LNG market, which discusses the challenges in the planning, purchasing, and supply of the imported commodity, and contextualises these challenges within the current regulatory and operational framework.Going forward, the government’s decision to allow greater involvement of the private sector in LNG import has the potential to address many of these issues, and ultimately enhance the share of the relatively cheaper fuel in the economy’s energy mix.