NationalVOLUME 15 ISSUE # 11

Living with crushing reforms

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 and they will continue to suffer in years to come.

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. To compound the situation, the World Bank has 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 latest report “2020 Global Economic Prospects”, it forecast Pakistan’s current year growth rate at 2.4 per cent — 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. Although recent tensions between India and Pakistan have abated, a reescalation would damage confidence and weigh on investment in the region. 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.

Growth in the region is expected to rise to 5.5pc in 2020, assuming a modest rebound in domestic demand and as economic activity benefits from policy accommodation in India and Sri Lanka and improved business confidence and support from infrastructure investments in Afghanistan, Bangladesh, and Pakistan. 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 (the nominal effective exchange rate depreciated about 20pc over the past year) 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.” Also progress in fiscal consolidation has broadly weakened. 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.” Growth in India is projected to decelerate to 5pc in FY2019/20 amid enduring financial sector issues.

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.

Few months ago, 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 recently, 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 16 months in office and can improve the situation in coming months and years. Prime Minister Imran Khan has asked people not to lose patience with the government and wait for results of its harsh economic measures. He does not know how rising prices of essentials have affected the lives of the common people. The government, especially in the Punjab and Khyber Pakhtunkhwa, where the Pakistan Tehreek-i-Insaf (PTI) rules, cannot absolve itself of profiteering, hording and black-marketing by retailers. It has left the people at the mercy of mafias while it does not require money to take action against them.