NationalVOLUME 15 ISSUE # 06

A depressing picture of Pakistan economy

In its annual report, the World Bank has cut Pakistan’s economic growth forecast for the next two years and said that the PTI government would miss inflation, public debt, and fiscal deficit reduction targets. The report takes a deep look at the challenges facing Pakistan and opines that the Pak rupee needs to be further devalued.
According to the World Bank, for the first time since 2001 Pakistan’s poverty reduction efforts would slow down due to macroeconomic adjustments initiated under the $6 billion 39-month International Monetary Fund (IMF) programme. All key macroeconomic targets, except current account deficit, will be missed, and in the fiscal year 2019-20, the economy would grow at a rate of only 2.4%, which is in line with the IMF projections. The deceleration in growth is due to a tight monetary policy and depressed domestic demand. It may be recalled here that in April, the WB had predicted Pakistan’s economy to grow by 2.7% in this fiscal year and 3.9% in the next fiscal year.
However, things will turn for the better in the year 2020-21, when economic growth will rise to 3% as macroeconomic conditions improve and external demand picks up on the back of structural reforms and increased competitiveness. But the recovery to a large extent will be conditioned by stability in global markets, a decline in international oil prices and reduced political and security risks.
According to the WB report, the poverty headcount, measured using the USD 1.90 per person per day international poverty line, is projected to remain at the last fiscal year level of 3.1%. The poverty measured using the USD 3.2 line is expected to decline from 31.4% last year to 31.2% in FY20, while poverty measured using the USD 5.5 poverty line is projected at 72.5% in this fiscal year, compared to 72.6% in last fiscal year.
The report has pointed out that vulnerable households’ ability to weather the economic impact of the crisis will depend on the inclusiveness of growth, food and non-food inflation, and the resilience of sectors relevant for their employment, agriculture, construction, and wholesale/retail trade. Unfortunately, the government would miss all these targets for this fiscal year.
Pakistan’s public debt profile also remains a matter of concern. Against the Ministry of Finance’s target to bring the public debt down to 77.6% of GDP, the public debt-to-GDP ratio is expected to remain high at 82.9% of the GDP in this fiscal year, far higher than the parliament’s approved statutory limit of 60% of the GDP. Next fiscal year too, the public debt to GDP ratio would remain at 80.8%, increasing Pakistan’s exposure to external shocks. According to the report, “Pakistan’s debt vulnerabilities will remain high due to large foreign currency debt amortizations and sizeable refinancing of short-term domestic debt.”
As for inflation, WB’s diagnosis is that it may rise to 13 percent during the current fiscal year – higher than the State Bank of Pakistan’s target rate and its forecast of 11-12%. The increase in prices will be driven by the second-round impact of exchange rate pass-through to domestic prices.
A silver lining is the current account deficit which is expected to decline to 2.6% of GDP in this fiscal year in line with the government and the SBP’s targets. In the next fiscal year, the WB has projected a further reduction in the current account deficit to 2.2% of GDP due to increased exchange rate flexibility that will support a modest recovery in exports and rationalization of imports. However, the consolidated fiscal deficit, even after including grants, is projected to reach 7.5% of the GDP or Rs3.3 trillion. This is higher than the official target of 7.1% of the GDP. In the next fiscal year too, the WB has projected 6.2% of the GDP budget deficit.
The World Bank has made an interesting comparison of Pakistan’s economy with other regional economies. In the region, exports are going up, foreign direct investment is either higher or has remained flat, inflation is down and industrial production is increasing. By contrast, in Pakistan industrial production has contracted much earlier than in the rest of the world, as the country suffers a macroeconomic crisis. Other indicators like private sector credit are also slowing. FDI inflows have slowed down. Inflation is below target in India and Sri Lanka, but above in Pakistan.
Also, while other South Asian nations are cutting interest rates, Pakistan has increased its main policy rate nine times since the beginning of the last year. The last increase took place in July, when the SBP increased its rate by 100 basis points to 13.25%, due to high inflationary and external pressures.
The World Bank’s advice to South Asian nations is that in view of global and domestic uncertainties, they should adopt stimulating economic policies to boost private consumption and investments.