The International Monetary Fund (IMF) has come out with a new projection for Pakistan’s economy. It expects a lower GDP growth rate in 2020-21 of 1 percent only as compared to the April estimate of 2 percent. The downward revision of the GDP growth rate has been made in the light of ground realities – the damage to crops from the locust attack and heavy monsoon rainfall. There are also fears of a second wave of COVID-19, which could lead to lockdowns and other restrictions on economic activities.
In this context, it is relevant to add here that the World Bank has projected a growth rate of only 0.5 percent in 2020-21. The IMF also expects the overall rate of investment in the economy to fall sharply from 15.4 percent of GDP to 13.8 percent of GDP and then recover to 14.5 percent of GDP in 2021-22. This means that the level of investment will actually fall in real terms during the current financial year by over 2 percent, given the uncertainties ahead. Already, in the first quarter imports of machinery have fallen by as much as 17 percent.
The government is striving hard to sustain the investment momentum. During the first three months, the releases from the federal PSDP have shown a growth of 13 percent, but it is unlikely that the growth rate can be sustained in the absence of a corresponding growth in revenues for which extra efforts will have to be made.
Inflation is a critical element in the emerging situation. Earlier, in April, it was expected to be 8 percent in the former year and 7.3 percent in the latter year. Now the projection has been revised upwards to 8.8 percent in 2020-21. The first three months of 2020-21 have witnessed an average increase in the Consumer Price Index (CPI) of 8.8 percent. Therefore, the IMF expects this average rate to persist over the year. But the end-of-period rate of inflation in June 2021 is projected by the IMF at 10.2 percent.
There are several factors driving the inflationary pressure. The year 2019-20 saw a high rate of expansion in the money supply of 17.5 percent which will strongly impact the rate of inflation in 2020-21. Also, supply-shocks due to lockdowns in coming months could exacerbate the inflationary situation. It is also expected that the oil price could rise from the low level of $40 per barrel in the earlier part of 2021. Further, increases in power and gas tariffs could exert cost-push pressure on the price level.
On the plus side, the budget deficit is expected to be reduced from 8 percent of GDP in 2019-20 to 6.7 percent of GDP in 2020-21 and to 5.2 percent of GDP in 2021-22. The process of fiscal stabilization is to be achieved by strong growth annually in total revenues of over 17 percent in 2020-21 and in 2021-22. FBR revenues are expected to rise by as much as 23 percent during the current fiscal year, although the performance in the first four months has been short of the target with a growth rate of 4 percent only. The required growth rate to achieve the target in the next eight months is almost 30 percent. It is a moot point whether this target can be achieved.
In the overall context, controlling expenditure is the key to economic sustainability and growth. Total expenditure is expected to be reduced from 23.1 percent of GDP in 2019-20 to 22.8 percent of GDP in 2020-21 and to 22.2 percent of GDP in 2021-22. This apart, however, there is a need for higher spending to provide relief to the large number of poor households who have suffered due to the negative impact of COVID-19.
In terms of the conditionalities agreed upon, the IMF expects Pakistan to bring down the deficit to almost 5 percent of GDP by 2021-22, because it thinks that the country does not have the fiscal space to carry a larger deficit which could spill over into a larger current account deficit. It is gratifying to note in this connection that Pakistan has greatly stabilized the economy on the external front in the first quarter of 2020-21. The current account in the balance of payments has gone into a surplus, supported by strong growth in remittances and containment of imports.
This provides some space for pursuing a more expansionary fiscal policy now and for providing some relief to the impoverished population hit by COVID-19 lockdowns. In the days ahead, the IMF will have to show more leniency in setting targets so that the government can take better care of those below the poverty line and the large unemployed population in need of official handouts to tide over a difficult period. In the final analysis, humanitarian considerations are as important as hard-nosed economic policy-making.