InternationalVOLUME 15 ISSUE # 18

Economy: All is not lost

All international financial institutions have painted a gloomy picture of Pakistan’s economy in the wake of the Covid-19 pandemic. The country is projected to miss all targets and needs to reset them in the next year. However, there are still chances of recovery of the economy after stabilisation efforts and regulatory measures yielded remarkable improvements during the first half of fiscal year 2020.

Contrary to forecasts by the State Bank of Pakistan (SBP), the International Monetary Fund (IMF) and the World Bank (WB), a top international credit rating agency has anticipated that Pakistan’s economic growth will not shrink as much as it is being feared in response to the coronavirus pandemic. Moody’s Investors Service has estimated Pakistan’s growth rate could slide to two per cent during the current fiscal year owing to the Covid-19 outbreak and believed recent steps by the State Bank of Pakistan (SBP) would soften the impact of the pandemic on the country’s banks.

The forecast is in contrast to recent projections by international financial institutions. The World Bank has forecast Pakistan to fall into a recession – for the first time in 68 years. It has bracketed Pakistan with Maldives, Sri Lanka and Afghanistan whose GDP growth forecast for the fiscal year will remain negative. Earlier, it had estimated 1pc growth in the current fiscal year 2019-20. It projected a decline in Pakistan’s national output in the range of 2.2pc to 1.3pc, which would also hit personal incomes badly. With 1.8pc population growth, that would imply a painful decline in per capita income, it warned. The International Monetary Fund (IMF) feared Pakistan could miss all economic targets during the ongoing fiscal year as the country was facing unprecedented health and economic shocks from the outbreak. Pakistan’s economy could contract by 1.5pc in FY2020, a downward revision of about 4 percentage points due to a decline in consumption, investment, international trade, remittances, and private capital flows, it said. In its latest report on Pakistan’s economy, the IMF noted that the budget deficit would swell to Rs4 trillion in the current fiscal year (FY20) against an early projection of Rs3.2 trillion. The Asian Development Bank (ADB) also projected Pakistan’s economic growth to shrink to 2.6pc in 2020 from 3.3pc in 2019. In its latest report, it said the Covid-19 outbreak would pose a downside risk to growth prospects as it further dampened consumer demand and as private businesses were temporarily shut down in efforts to control the pandemic. It said weaker demand under Covid-19 could adversely affect exports.

However, Moody’s has come up with latest estimates about Pakistan’s economy after the pandemic. “We expect Pakistan’s real GDP growth to slow to 2.0pc-2.5pc for fiscal 2020, lower than our earlier forecast of 2.9pc, reflecting the impact of the coronavirus pandemic,” the agency said in a statement. In March, it had formally reduced its forecast for Pakistan’s GDP growth rate to 2.5pc from its earlier estimate of 2.9pc in December, citing mostly external growth factors in the region. It said the consumption of services, which had underpinned growth in recent years, would be adversely affected by the movement restrictions. The textile sector, the country’s key manufacturing sector which accounted for around 60pc of exports, has also been hit by supply-chain disruptions and a decline or postponement of orders. Manufacturing loans (mainly to the textile and food sectors) accounted for 62pc of private-sector loans as of end-February 2020.

The rating agency expected the recent policy actions by the central bank to help top five Pakistani banks. On March 26, the State Bank of Pakistan (SBP) cut its policy rate 150 basis points to 11pc, reduced banks’ capital conservation buffers 100 basis points to 1.5pc, relaxed terms for new and existing loans and announced other forbearance measures to increase banks’ cushion against the economic impact of the coronavirus outbreak. “We expect the measures to mitigate banks’ asset-quality deterioration amid less business generation and loan growth in an economic slowdown,” Moody’s noted.

The policy rate reduction of March 26 to 11pc on top of a 75-basis-point cut on March 17 will help maintain credit growth, which Mood’s expected to remain below nominal GDP growth. Lower interest rates on loans will also improve borrowers’ repayment capacity. However, the lower rates will reduce net interest margins and diminish banks’ earnings. The SBP has offered cash-flow relief through loan refinancing schemes and loan payment holidays to borrowers such as exporters and manufacturers affected by disruptions caused the coronavirus outbreak. The central bank is allowing delayed principal payments (but not interest) for up to one year at the discretion of the lender, but application for the delays must be by June 30, 2020. The grace period lowers the risk of asset impairment and supports the value of securitised assets over the longer term. The central bank is allowing banks to classify restructured loans as performing unless the borrower has taken no action for 180 days after the originally scheduled payment date. The agency expected gradual recovery in economic activities would help the national economy to grow by more than 2pc in fiscal 2021.

The agency warned that Pakistan’s growing need for funds to finance the fight against the health crisis, address hunger and relief packages announced to support industries, construction sector and daily-wage earners during the lockdown would increase its fiscal deficit to 9.5-10pc of GDP. “We expect that Pakistan’s financing needs will rise because of coronavirus-related economic effects and the government’s Rs1.2-trillion ($7 billion, 2.7pc of GDP) stimulus package, approved on March 30.” The country recorded 8.9pc fiscal deficit in the previous fiscal year ended June 30, 2019. The global rating agency said the deficit would surge despite strong growth in revenue collection, which narrowed the deficit in first half (Jul-Dec 2019) of the current fiscal year. “We expect that general government debt will rise to around 87pc of GDP by June 2020 from around 83pc in June 2019 and gradually decline in subsequent years. In fiscal 2021, we expect the deficit to narrow given the government’s commitment to fiscal consolidation under its IMF programme, but remain wide at 8-8.5pc of GDP,” it said.

The State Bank of Pakistan (SBP), in its second quarterly report on the state of economy, has also noted some improvements. It said the current account deficit contracted to a six-year low, foreign exchange reserves increased, the primary budget recorded a surplus, and core inflation eased. Importantly, export-based manufacturing showed signs of traction and construction activities picked up, indicating that the economy was on the path to recovery. Progress under the IMF program remained on track and the credit rating agencies maintained their stable outlook for Pakistan during the review period and further improvements would require deep structural reforms to put the economy on a firm path towards sustainable growth.

It is clear that despite serious challenges, Pakistan can hope of a better economy in few months. The next fiscal year will set the tone for it. However, Pakistan will have to eliminate the pandemic as early as possible.