The State Bank of Pakistan has released its Annual Report on the State of Pakistan’s Economy for the fiscal year 2020-21 on Wednesday. Pakistan’s economy rebounded in FY21, with real GDP growth of 3.9 percent, according to the report. In addition, this growth in economic activity was accompanied by a 10-year low current account balance, which resulted in a significant increase in foreign currency reserves. Despite the Covid-related spending, the fiscal deficit decreased, improving the public debt-to-GDP ratio, contrary to the experience of the majority of countries worldwide. Headline Since non-food and non-energy prices remained relatively stable, the Consumer Price Index (CPI) remained low throughout the year. However, food prices remained high due to supply-side difficulties. Exceptional health pandemic management and quick and targeted monetary and fiscal responses to counter its impact on economic growth and livelihoods were noted in the report as facilitating the economic turnaround. A combination of policy rate cuts and targeted and time-bound measures, such as the Temporary Economic Refinance Facility (TERF), Rozgar payroll financing, the Refinance Facility to Combat Covid, and temporary loan deferment, helped the SBP’s liquidity support reach around 5pc of GDP by the end of FY21, according to the SBP’s report. Policy initiatives that helped the economy grow include encouraging the use of digital technology in the economy, and (ii) easing the terms of export and trade loans, as well as encouraging low-income families to get mortgage loans, and (iv) providing forward guidance for the near-term policy stance to help businesses make decisions in the face of Covid-related uncertainty. With an economic stimulus package, the government pumped in about 2pc of GDP to help 15 million families by distributing emergency cash payments. In addition, the government enacted a number of incentives to boost agricultural, manufacturing, and export activity in FY21. The report shows that real GDP growth rebounded on a broad scale. Large-scale manufacturing grew by 14.9pc in FY21, helped along by a low base effect from the Covid-led contraction in FY20 and favourable supply and demand dynamics. Even though agricultural growth was slightly lower than in FY20, the production of wheat, rice, and maize surpassed all previous records in FY21. Cotton’s decline was offset by an increase in the production of these crops. Wholesale and trade services saw a rapid rise in demand in FY21, thanks to an uptick in imports and an improvement in commodity-producing sectors. Economic activity rebounded in part due to an increase in private sector borrowing. Concessionary refinance programmes, such as TERF and the Long-Term Financing Facility, were instrumental in driving fixed investment loans during the year. Economic growth rebounded without a deterioration in the overall macroeconomic imbalances because the overall policy mix was still sound. After remittances and export revenues hit record highs for a second consecutive year, the SBP’s foreign currency reserves grew by $5.2 billion. Other multilateral and bilateral creditors have also helped the country by providing funds; the country has issued Eurobonds for the first time in a long time, and deposits and investments from non-resident Pakistanis have been made through Roshan Digital Accounts. According to the report, exports rebounded because of adherence to the market-based exchange rate system; subsidies for inputs; lower tariffs on imported raw materials; and expedited GST refunds. The Covid shock’s impact on Pakistan’s textile exports was also boosted by some deflected orders from competitors as the country emerged faster. Due to a rise in economic activity, supply-side challenges in wheat, sugar, and cotton as well as rising global commodity prices, exports partially offset an increase in import payments. The PKR depreciated by 3.0 percent against the US Dollar in the fourth quarter, mainly due to the accumulated current account surpluses, which had pushed the currency up by 10.0 percent from July to March. It was also reduced to 7.1 percent of GDP from 8.1 percent in FY20, which was a significant improvement. Spending on social safety nets, the economic stimulus package, and other sectors of the economy that needed help was made possible thanks to a cap on current non-interest expenditures. Additionally, development expenditures have begun to rise after falling for the previous three years. Circular debt was partially cleared by government payment of subsidies to the power sector. The FBR’s tax collection soared as the economy rebounded, imports increased, and tax administration was streamlined. The public debt-to-GDP ratio fell to 83.5 percent in FY21 as a result of the containment of the twin deficits and the appreciation of the PKR. Also in FY21, the average headline CPI inflation rate was 8.9 percent, which is within the SBP’s predicted range of 7-9 percent. Despite a resurgence in domestic demand, inflationary pressures were not felt in the economy because of the presence of some spare capacity. Inflation, on the other hand, remained volatile throughout the year due to the impact of rising fuel and electricity tariffs. Due to supply-side issues in non-perishable goods, food emerged as the largest contributor of inflation in FY21. According to the report, the current growth momentum can only be sustained and improved if structural impediments are removed. Consistent decline in the yield of important crops (especially cotton), inadequate export coverage of imports, low and declining productivity of labour, stagnant tax-to-GDP ratio, anemic investment-to-GDP ratio, and the rising financial burden of the power sector are some of the impediments to growth. For example, Special Economic Zones (SEZ) can play an important role in this context CPEC’s second phase, which is geared toward increasing bilateral trade and investment, has already given SEZs a boost in Pakistan. We have included a special section on the country’s SEZ landscape and policy recommendations to ensure that SEZs are successful in stimulating investment in the country.