NationalVOLUME 16 ISSUE # 13

Below par economic growth

International financial institutions have projected Pakistan’s economy to grow at 1.5pc for the current fiscal year compared to negative 0.4pc for the previous fiscal year. On the other hand, the world economy is expected to grow at 5.5pc, regional economies 8.3pc and Africa 3.2pc. It shows that Pakistan is expected to perform better this year, but it still lags far behind the rest of the South Asian countries and even Africa, which must be a cause of concern for the economic managers.

The International Monetary Fund (IMF) has projected Pakistan’s GDP growth rate at 1.5pc for the current fiscal year 2020-21, while the government expects the growth rate target of 2.1pc, with the expectation that the recovery of economic activities will help achieve the growth trajectory in the aftermath of overcoming the pandemic. However, the IMF has projected that Pakistan’s growth rate would be 4pc of GDP in next fiscal year 2021-22.

According to the Economic Outlook for 2021 update released by the IMF, the emerging and developing Asia region will grow at 8.3pc from its previous projection of 8pc. India’s economy is now expected to grow by 11.5pc in 2021, up 2.7 percentage points from the previous projection of a 8.8pc growth, reflecting the carryover from a stronger-than-expected recovery in 2020 after lockdowns were eased. India’s economy was estimated to have contracted by 8pc in 2020, according to the IMF data.

China will continue to support the region’s growth outlook with its economy projected to expand by 8.1pc in 2021 and 5.6pc in 2022, the IMF said. “Considerable differentiation is expected between China—where effective containment measures, a forceful public investment response, and central bank liquidity support have facilitated a strong recovery—and other economies,” the IMF said. It also raised the global economic growth forecast to 5.5pc in 2021, up 0.3 percentage point from the previous forecast, reflecting expectations of “vaccine-powered strengthening of activity later in the year and additional policy support in a few large economies”. Malaysia is projected to grow at 7pc, Turkey 6pc, France 5.5pc, The US 5.1pc, Mexico 4.3pc and Nigeria 1.5pc.

The Asian Development Bank has also noted that the pandemic has interrupted the macroeconomic recovery in Pakistan, resulting in a sharp contraction in growth, a rise in public expenditures, and a loosening of monetary policy to mitigate the health and economic impacts. “As with many countries in the region, the pandemic has affected Pakistan, revealing the extent to which the population is exposed to economic and social vulnerabilities,” said ADB Director General for Central and West Asia Eugene Zhukov. The ADB has endorsed a new 5-year country partnership strategy (CPS) to help restore economic stability and growth in Pakistan by enhancing people’s well-being and expanding economic opportunities as the country works to overcome the pandemic.

As the growth rate is expected to remain low, Pakistan’s fiscal deficit has widened to 1.8pct, or Rs822 billion, of GDP in the first five months of FY21 compared to 1.6pc (Rs676b) in the corresponding period last year. In its monthly economic update and outlook for January, the Ministry of Finance observed that the current outlook ensured economic revival on the basis of continued recovery seen in recent months but there was possibility of slower economic activities, especially in the services sector depending on the intensity and duration of the pandemic. It said the primary balance posted a surplus of Rs216b (0.5pc) during July-November FY21 against the surplus of Rs117b (0.3pc of GDP) in the same period of FY20, showing an increase of about 84.6pc. In recent months, oil prices have been very volatile, international food prices have been rising. However, exchange rate movements remained almost neutral.

The impact of rising international food prices was mitigated by government policies focusing on improving the supply stream of food products and improving the functioning of domestic food markets. The report showed that exports during the July-December period decreased by 4.8pc to $11.8 billion, while imports rose by 4.8pc to $23.2 billion. The finance ministry said the sudden surge in imports was due to an increase in international oil prices and import of additional food products, which enhanced imports by $1.2 billion in December 2020 alone.

Moody’s Investor Service has also forecast Pakistan’s economy to grow by 1.5pc during the current fiscal year and found Pakistani banks to be stable owing to the government support but warned banking sector risks were growing. “Economic activity will remain below pre-outbreak levels, although the economy should return to modest 1.5pc growth in fiscal year 2021,” Moody’s said in its outlook.

The International Monetary Fund (IMF) has also praised Pakistan for improving its business environment. In a report, the IMF said that Pakistan had reduced the period for obtaining permits required for construction through reforms of the business laws. “Pakistan is one of the countries in the Middle East, North Africa and Central Asia, where the time period has reduced because of the measures taken for the development of the construction sector,” the report said.

Undoubtedly, the economic situation has improved since April-June 2020, yet it has not achieved the required levels. In its last report, the Asian Development Bank forecast broad economic recovery in Pakistan with 2pc GDP growth in fiscal year 2021, with improved economic sentiment. In its Asian Development Outlook, the ADB said, “Broad economic recovery is projected for fiscal year 2021, with GDP growth estimated to rebound to 2pc, lower than forecast in 2020. The forecast assumes that the pandemic impact will subside by the end of the second quarter of the fiscal year, allowing global conditions to normalise and economic sentiment to improve.”

Despite the relatively positive projections for Pakistan’s economy, rising prices are the biggest issue of the people of the country. The government claims to have brought down inflation. However, people have lost hope of any relief from the government after a 15pc hike in the power tariff and a persistent increase in fuel prices.