InternationalVOLUME 15 ISSUE # 12

An economic upturn round the corner?

The United Nations has forecast Pakistan’s economy to take a turn for the better from the next year on the back of the reforms introduced by the government of Prime Minister Imran Khan. The report is a highly positive sign for the country at a time when the global economy is slowing down.

The PTI government’s commitment to reforms, coupled with productive investment in infrastructure and strategic capacity development, would be critical for Pakistan to find its way back to its previous growth path, according to a new report on the world economic situation released by the United Nations. The report, titled “World Economic Situation and Prospects 2020” forecast Pakistan’s economy to recover slightly from 2021 onward as increased government revenues from a tax hike allow expanded public investment and as other government reforms required by the International Monetary Fund (IMF) begin to bear fruit. However, continued commitment to reform, combined with productive investment in infrastructure and strategic capacity development, will be critical for the country to find its way back to its previous growth path.

The report notes Pakistan has been struggling with a balance-of-payments crisis and the burden of high public debt, led the government to seek an IMF package. However, corresponding fiscal tightening, high inflation and security concerns have curtailed the government’s ability to address the slowdown. Export growth has fallen to 0.4pc owing to disappointing sales of textiles, which constitute 60pc of the country’s goods exports. GDP growth has remained weak at 3.3pc in both 2018 and 2019—well below the 4–6pc range of previous years,” the UN said. In the entire South Asian region, the UN forecast that economic growth would remain below the rates seen in the recent past but, despite facing daunting challenges to sustainable development, the region might recover to 5.1pc growth this year after falling to a decade-low of 3.3pc in 2019. The report particularly mentioned the region’s young labour force as its greatest capital with the potential to drive the development, particularly within the Sustainable Development Goal (SDG) framework, but warned it faced “serious systemic and structural barriers to employment.” Across the region, young people are among those struggling the most. In Afghanistan, Bangladesh, Pakistan and Sri Lanka, for example, more than 30pc of youth are not in education, employment or training.

The UN found female labour force participation in South Asia dwindling, which currently stands at 26pc, compared with 52pc for Latin America and the Caribbean and 58pc for East Asia and the Pacific. Demographic pressures and rapid urbanisation will further compound these problems. The report said the global economy recorded its lowest growth of the decade in 2019, falling to 2.3pc as a result of protracted trade disputes and a slowdown in domestic investment. However, it forecast a modest acceleration in global growth, reaching 2.5pc in 2020 and 2.7pc in 2021. Warning that a flare-up of trade tensions or an escalation of geopolitical tensions could derail a recovery, the report said that slower world growth “threatens to undermine progress towards eradicating poverty, raising living standards, and creating a sufficient number of decent jobs”. It pointed out that in the United States, the world’s largest economy, GDP growth of 2.9pc in 2018 slowed to 2.2pc in 2019 and is projected to fall further to 1.7pc in 2020 with a slight increase to 1.8pc in 2021. On the other hand, in China, the world’s second largest economy and the East Asian region’s powerhouse, the economy grew 6.6pc in 2018, then slowed to 6.1pc in 2019 and is projected to slip further to 6pc in 2020 and 5.9pc in 2021. Manufacturing in the European Union will continue to be held back by global uncertainty, but this will be partially offset by steady growth in private consumption. This will allow a modest rise in GDP in the EU from 1.4pc in 2019 to a projected 1.6pc in 2020 and 1.7pc in 2021.

The IMF has also warned that the world economy is increasingly vulnerable to the impact of the climate emergency as its downgraded its forecasts for 2020 and 2021. Urging governments to make greater strides to reduce carbon emissions and build green infrastructure, the IMF said one of the main risks to its forecasts came from the growing costs of the climate crisis and the harm caused by protectionist trade policies. It also cited political wrangling between the US and Iran, and the potential for social unrest to spread across the Middle East as further threats to the global economic outlook. In its half-yearly health check on the global economy, the IMF said: “Weather-related disasters such as tropical storms, floods, heatwaves, droughts and wildfires have imposed severe humanitarian costs and livelihood loss across multiple regions in recent years.” It said the global economy would grow by an estimated 3.3pc in 2020, down from a previous forecast of 3.4pc. Growth in 2021 is expected to be 0.2 percentage points lower than originally forecast at 3.4pc.

Pakistan hopes to reap fruit of “harsh” fiscal adjustments. Its current account deficit narrowed 75pc to $2.15 billion in the first half (Jul-Dec) of the current fiscal year. The deficit had been recorded at $8.61 billion in the corresponding period of the previous fiscal year, the State Bank of Pakistan (SBP) reported. The drop came on the back of central bank efforts aimed at discouraging imports and encouraging exports. It let the rupee depreciate by over 52pc against the US dollar and jacked up the benchmark interest rate by 7.5 percentage points to an eight-year high at 13.25pc in the 18 to 20-month period which ended on July 31, 2019. Consequently, the import of goods dropped 20pc to $22.20 billion in the first half of FY20, workers’ remittances remained steady at $11.39 billion and exports of goods improved 4.5pc to $12.39 billion. The sharp contraction in the current account deficit strengthened independent estimates that the deficit may stay lower than the IMF projection of $6.5 billion for the fiscal year.

Pakistan’s foreign currency reserves have risen by 58pc since July 2019 to a 21-month high at $11.58 billion on January 10, 2020. They also brought stability to the fast declining rupee, which of late strengthened to around Rs155 to the US dollar after falling below Rs160. According to the SBP, Pakistan has made a significant improvement in attracting foreign direct investment (FDI) during the first half of the current fiscal year. The FDI inflows in the first half of the current fiscal year jumped 68.3pc in comparison to the figures in the same period last year. The increase in FDI means the government is succeeding in making Pakistan an attractive place for investment for foreign businesses.

The PTI deserves appreciation for the reforms, though they have overburdened the common people. Its focused efforts to bring about reforms and positive impacts in the ease of doing business are bearing fruit in the form of an increase in FDI. It is hoped the government policies will become more effective and improve the lot of the common people in days to come.