NationalVOLUME 15 ISSUE # 22

Light at the end of the tunnel?

At a time of depressing forecasts for the global and Pakistan economy, a new report suggests Pakistan could grow at 2pc in the current fiscal year 2020-21. It shows Pakistan is on the path to recovery and it will progress quickly after the coronavirus pandemic ends.

“Pakistan’s economy was on the path to recovery before Covid-19, and once its impact subsides, Pakistan will resume its efforts to address macroeconomic imbalances and initiate structural reform, likely holding economic growth to a projected 2.pcin FY2021,” the Asian Development Bank said in its Asian Development Outlook. It projected Pakistan’s economy to regain some pace and grow at 2 percent in fiscal year 2020-21.

Hit hard by Covid-19, South Asia is forecast to contract by 3pc in 2020, compared to 4.1pc growth predicted in April. Growth prospects for 2021 are revised down to 4.9pc from 6pc. India’s economy is forecast to contract by 4pc in fiscal year (FY) 2020, ending on 31 March 2021, before growing 5pc in FY2021. Economic activity in Southeast Asia is expected to contract by 2.7pc this year before growing by 5.2pc in 2021. Contractions are forecast in key economies as containment measures affect domestic consumption and investment, including Indonesia (-1.0pc), the Philippines (-3.8pc), and Thailand (-6.5pc). Viet Nam is forecast to grow 4.1pc in 2020. While that is 0.7 percentage points lower than ADB’s April estimates, it is the fastest growth expected in Southeast Asia.

Central Asia’s economic activity is expected to contract by 0.5pc compared to the 2.8pc growth forecast in April due to trade disruptions and low oil prices. Growth is forecast to recover to 4.2pc in 2021. Restricted trade flows and declining tourism numbers have dampened economic outlook for the Pacific subregion. The subregional economy is forecast to contract by 4.3pc in 2020 before rising to 1.6pc growth in 2021.

It said overall the developing Asia would barely grow in 2020 as containment measures to address the coronavirus pandemic hamper economic activity and weaken external demand. It forecasts growth of 0.1pc for the region in 2020 which is down from the 2.2pc forecast in April and would be the slowest growth for the region since 1961. Excluding the newly industrialized economies of Hong Kong, China; the Republic of Korea; Singapore; and Taipei, China, developing Asia is forecast to grow 0.4pc this year and 6.6pc in 2021. Economies in Asia and the Pacific will continue to feel the blow of the pandemic this year even as lockdowns are slowly eased and select economic activities restart in a “new normal” scenario, it said.

East Asia is forecast to grow 1.3pc in 2020—the only subregion to experience growth this year—while growth in 2021 will recover to 6.8pc. Growth in the PRC is forecast at 1.8pc this year and 7.4pc in 2021, compared to the April estimates of 2.3pc and 7.3pc, respectively.

Inflation for developing Asia is forecast at 2.9pc in 2020, down from a forecast of 3.2pc in April, reflecting depressed demand and lower oil prices. In 2021, inflation is expected to ease to 2.4pc. The ADB suggested that the inflation rate would remain 8pc against the earlier projection of 8.3 percent in the new fiscal year.

The government expects that a V-shaped economic recovery is highly likely when the spread of the coronavirus slows down, according to the Pakistan Economic Survey 2019-20. It notes that the country was on the path to stabilisation until the pandemic hit and hence, any assessment of the economic performance should be made with respect to both pre- and post-Covid-19 basis. The pre-pandemic situation was marked by extraordinary improvement on the external front, driven by a 70.8pc plunge in the current account deficit to $3.3 billion during July-April FY20. It was mainly due to a 29.5pc contraction in trade deficit and 5.5pc increase in workers’ remittances.

It was accompanied by a surge in foreign direct investment of 137.3pc to $2.1b in July-March, which the survey attributes to the improvement in the ease of doing business index by 28 places. Similarly, improvements were witnessed on the fiscal side, where the government even posted a primary surplus in FY20, and year-on-year growth in tax collection – despite missing the 2019-20 target. However, in the post-pandemic situation, the economy has taken a hit with GDP in FY20 expected to shrink by -0.38pc.

The national economy had begun showing signs of improvement with foreign exchange reserves growing steadily, fiscal and current account deficits coming under control, encouraging progress on FATF conditions, a stable outlook from global credit rating agencies and confidence provided by the IMF loan programme. “However, this optimism is now subject to risks arising from the global and domestic spread of Covid-19,” the State Bank of Pakistan (SBP) said in its second quarterly report. It had revised down its projection for economic growth by half a percentage point to 3pc for the year after infection cases started rising slowly in the country in the second half of March.

“These projections (gross domestic product/GDP growth) are now likely to be revised downward further,” the central bank said, but did not elaborate as to what extent growth numbers would weaken further. International financial institutions, like the World Bank, anticipated negative growth of 1.3pc in Pakistan’s economy for the first time in the past 68 years – since 1951-52. The SBP said domestic economic activity and consumer demand were all set to weaken in response to the measures that were must to contain the coronavirus pandemic including suspension of domestic and international flight operations and strictly tightened cross-border movement.

The statistics show Pakistan was steadily progressing when the pandemic struck. It has made required structural reforms in the meanwhile and can hope for a V-shaped recovery after the pandemic passes.