FeaturedNationalVOLUME 15 ISSUE # 06

Another macroeconomic crisis?

The government of Prime Minister Imran Khan claims to have turned around the national economy within a year while the World Bank says Pakistan faces yet another macroeconomic crisis due to high twin deficits and low foreign reserves.
Inflation is expected to increase to 13pc in Pakistan in fiscal year 2020, which means the common people will have to face even more trouble in the next year after facing the hardest times of their lives in the current year. Pakistan’s public debt is also feared to surge to 78.6pc of the total size of its economy this year, which leaves little space for public welfare.
Pakistan’s economic growth is expected to remain low in the near term. The outlook for medium-term growth hinges on the country’s ability to implement necessary structural reforms to boost competitiveness and achieve sustained growth, according to a World Bank report titled “South Asia Focus: Making (De)centralisation Work.” Progress on poverty reduction is expected to be limited during the macroeconomic adjustment period. Measures to restore macroeconomic stability in Pakistan weigh heavily on growth, which is expected to have dropped to 3.3pc. Economic policies over the past few years have resulted in increased debt levels and an erosion of fiscal and external buffers, affecting the economy’s ability to absorb shocks. The country needs to restore the buffers, especially because turbulence in global financial markets could affect the country’s access to private external financing. And the weakening global economy and rising trade tensions could dampen external demand.
Pakistan’s growth is projected to decelerate to 2.4pc in the fiscal year 2020, with continued fiscal consolidation and a tight monetary policy stance. The IMF adjustment programme entailed a rebalancing from domestic to external demand. The report says growth is expected to recover slowly, to 3pc in fiscal year 2021, as macroeconomic conditions improve and external demand pick up on the back of structural reforms and increased competitiveness. The recovery is conditional to relatively stable global markets, a decline in international oil prices and reduced political and security risks. Increased pressures on the asset quality and capital adequacy buffers due to the economic slowdown and inflationary environment could hold back the forecast rebound in growth, especially when strong short-term deposit mobilisation due to recent increases in policy rates continues to be intermediated mostly towards government securities.
The main domestic risk emerges from potential difficulties in implementing the necessary adjustments and structural reforms. The 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 and retail trade. Inflation is expected to increase in fiscal year 2020 to 13pc but it will start declining afterwards, the World Bank noted.
The increase in prices will be driven by the second-round impact of exchange rate pass-through to domestic prices. The report says the country’s commercial banks will remain well-capitalised. However, increasing public sector demand for credit, mainly federal government borrowing, and rising interest rates are expected to crowd out private credit in the near-term. The current account deficit is expected to decline to 2.6pc of GDP in fiscal year 2020 and further to 2.2pc in fiscal year 2021, as increased exchange-rate flexibility would support a modest recovery in exports and rationalisation of imports. The consolidated fiscal deficit including grants is projected to reach 7.5pc of GDP in fiscal year 2020 and remain elevated at 6.2pc in fiscal year 2021. The public debt-to-GDP ratio is expected to remain high in fiscal year 2021 at 80.8pc, increasing the exposure to debt-related shocks.
The International Monetary Fund (IMF) has forecast even worse forecast for Pakistan’s public debt. In its “Global Financial Stability Report,” it feared Pakistan’s debt could surge to 78.6pc of the total size of its economy this year, which is not only higher than the previous year but also in violation of an act of the parliament. The report says the budget deficit would remain at 7.4pc of the Gross Domestic Product (GDP), which is also slightly higher than the official target set by the Ministry of Finance. The higher budget deficit and public debt projections mean that over 60pc of the Federal Board of Revenue’s (FBR) taxes would be consumed in servicing the debt, which grew at an alarming rate in the last fiscal year 2018-19. The IMF debt projections are lower than the forecasts made by the World Bank in its latest report, South Asian Economic Focus Fall 2019. The WB has said the public debt-to-GDP ratio is expected to remain high at 82.9pc of the GDP in this fiscal year. The WB noted that even in the next fiscal year, the public debt to GDP ratio would remain at 80.8pc, which could increase Pakistan’s exposure to debt-related shocks.
A major challenge for the government is to collect Rs5.5 trillion in revenues that require a 44pc growth rate. During the first quarter, the Federal Board of Revenue (FBR) collected Rs958 billion with an annual growth rate of 15pc despite blocking exporters’ refunds and taking advances from large firms. The FBR also faces stiff resistance from traders over new tax measures.
Though the World Bank has exonerated the Pakistan Tehreek-i-Insaf (PTI) government of growing public debt and blamed past governments for the chronic problem, yet the government cannot absolve itself of the financial crisis. If it could not increase its revenue, it should have at least curtailed its expenditure. Inflation is the highest in Pakistan’s history and it is feared to jump further in the next fiscal year. It is expected to ease in 2021, but the question is: whether the common people will suffer in silently or take to the streets? It is a fact that the government has left the people at the mercy of profiteers and hoarders. Prices of essentials are not increasing after months or weeks, but on a daily basis. The PTI governments in the Punjab and Khyber Pakhtunkhwa could have activated price control magistrates to check prices, but it appears the rulers are not bothered about even taking cosmetic measures to resolve public issue.