NationalVOLUME 15 ISSUE # 15

Depressing forecasts

Pakistan’s growth rate is expected to remain lower than estimates by national and international institutions. The government has introduced reforms which have added to problems of the common people and depressing forecasts mean there is no prospect of relief for them anytime soon.

Pakistan’s GDP growth is expected to stand at 2.4pc in the ongoing fiscal year from early forecasts of 2.7pc. Average inflation will remain 9.4pc in the period. Pakistan also faces downside risks to the exports outlook, due to rises in domestic power tariffs and a moderation in external demand. The coronavirus epidemic poses new threats. Oxford Economics, a forecasting and quantitative analysis firm, says Pakistan’s economic prospects are constrained by its persistent infrastructure deficit, fiscal mismanagement and political uncertainty and suggests major reforms to improve long-term growth potential. In its report on Pakistan, it has predicted the exports at $25.8 billion in 2019-20 and at $27.8 billion in 2020-21 and at $31b in 2021-22. Higher food prices have resulted in inflation reaching 14.6% in January, which will weigh on private consumption and delay monetary loosening. And public consumption and investment will slow as the government cuts expenditure further to meet IMF targets. High interest rates, lower domestic demand and weak business sentiment will weigh on private investment growth. But net exports should exert a smaller drag on growth as export growth outpaces import growth.

To meet the IMF target of cutting the primary fiscal deficit to 0.6% of GDP in FY20, the government has phased out tax exemptions given by the previous government, raised the maximum income tax rate from 15% to 35%, lowered the threshold for minimum taxable income and introduced new customs duties and federal excise taxes. Electricity and gas prices are also being raised sharply to rein in circular debt. But despite strong growth in H1 FY20, revenue collection is below the ambitious target despite help from one-off boosts to non-tax revenues, which could mean additional revenue-raising measures or further cuts to expenditure being introduced in the coming months. The fiscal consolidation efforts are expected to continue into FY21, keeping public spending less supportive of growth.

The agricultural sector in FY20 is expected to recover from the growth of just 0.8% in FY19 as access to credit improves. But lack of availability of water, higher cost of inputs and adverse weather conditions will remain key downside risks to the recovery. The industrial outlook is weak as businesses face higher borrowing costs, removal of tax incentives, lower demand, increased input costs due to a weaker rupee and higher power tariffs. Despite the modest recovery expected in the agricultural sector, lower industrial production and import growth are likely to weigh on services growth and overall economic activity in FY20.

Private investment growth is also expected to remain weak. The weaker rupee, which lost over 30% of its value in FY19, has raised the cost of inputs and squeezed firms’ profit margins. Operating costs for businesses are expected to rise further in FY20 as the zero-rate sales tax on utilities, inputs and products of five key export-oriented sectors are withdrawn. Despite the challenging external environment, external demand should remain supportive for export-oriented industries and growth because of the weaker rupee.

Pakistan’s major challenges are stabilisation and protection of the economy against external risks, rising global prices, current account deficit, rising debt servicing, and continued losses of public sector enterprise. Missed revenue collection is compounding the problem. The World Bank has also slightly lowered Pakistan’s growth rate projections for the current fiscal year and the next two years but forecast a 3.9pc growth rate in FY2022. In its report “2020 Global Economic Prospects”, it forecast Pakistan’s current year growth rate at 2.4pc — about 0.3pc lower than its estimates of June 2019 — before touching 3pc next fiscal year and 3.9pc in FY2022.

The report pointed out Pakistan as an exception in the South Asian region for having high inflation, in contrast to mostly a stable inflation rate in the region on the back of weak domestic demand and broadly stable currency markets. It noted the regional outlook for 2020 has deteriorated recently, and risks are tilted to the downside. Financial sector weakness will likely weigh on activity unless balance sheet vulnerabilities are addressed. For countries with elevated debt levels and large current account deficits, like Pakistan and Sri Lanka, an unexpected tightening in global financing conditions could sharply raise borrowing costs and lead to stops in capital inflows.

The bank said the growth had decelerated in Pakistan to an estimated 3.3pc in FY2018-19, reflecting a broad-based weakening in domestic demand. “Significant depreciation of the Pakistani rupee resulted in inflationary pressures. Monetary policy tightening in response to elevated inflation restricted access to credit. The government retrenched, curtailing public investment, to deal with large twin deficits and low international reserves,” it noted. Pakistan’s budget deficit rose more sharply than expected. Contributing factors were a shortfall in revenue collection, combined with a sizable increase in interest payments.

The bank expected macroeconomic adjustment in the country including a continuation of tight monetary policy and fiscal consolidation. However, the lower growth rate forecast is in line with a similar (0.2pc) decline in the global growth rate during the current year and 1.5pc decline in the South Asian region. Growth in Bangladesh is projected to remain above 7pc through the forecast horizon, “growth in Pakistan is projected to languish at 3pc or less through 2020 as macroeconomic stabilisation efforts weigh on activity.”

Key risks to the regional outlook include a sharper-than-expected slowdown in major economies, a re-escalation of regional geopolitical tensions, and a setback in reforms to address impaired balance sheets in the financial and corporate sectors. South Asian growth is estimated to have decelerated to 4.9pc in 2019, substantially weaker than 7.1pc in the previous year. The regional deceleration was pronounced in the two largest economies: India and Pakistan. Weak confidence, liquidity issues in the financial sector in India, and monetary tightening in Pakistan caused a sharp slowdown in fixed investment and a considerable softening in private consumption, the report said.

Earlier, the World Bank had warned that Pakistan faced yet another macroeconomic crisis due to high twin deficits and low foreign reserves. It forecast Pakistan’s economic growth 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, it said. A recent report by the United Nations said Pakistan’s economic crisis had not been resolved despite support from China and Saudi Arabia and a large International Monetary Fund loan. According to the State Bank of Pakistan, it is vital for the government to continue to address the underlying structural vulnerabilities and put the economy on a balanced and sustainable growth trajectory. In its first quarterly report, it said Pakistan’s economy was moving progressively along the adjustment path.

It is a fact that signals of Pakistan’s economic recovery are weak despite tall claims of the government. However, it has completed only 18 months in office and can improve the situation in coming months and years.