NationalVOLUME 15 ISSUE # 19

Moody’s projects a hopeful picture

Amidst predictions of a sharp downturn, Moody’s Investors Service – one of the world’s top three credit rating agencies – has come out with a hopeful projection about Pakistan’s economy. It has forecast that Pakistan’s economic growth will shrink much less than what the country’s central bank, the International Monetary Fund (IMF) and the World Bank have projected in response to the coronavirus pandemic. To quote Moody’s, “We expect Pakistan’s real GDP (gross domestic product) to contract modestly by 0.1-0.5% in fiscal 2020.”

It may be added here that earlier the State Bank of Pakistan, the IMF and the World Bank had anticipated the country’s growth contraction to be in the range of 1.3-1.5% for the year ending June 30, 2020. However, despite a month-long lockdown, the government allowed labour-intensive industries, such as agriculture, construction and textile, to resume operations on April 15, which, according to the US rating agency, “should aid a gradual recovery in domestic consumption.”

As underlined by Moody’s, the measures taken by the State Bank of Pakistan helped ease the situation. The central bank has cumulatively cut the benchmark interest rate by 425 basis points since March to a 17-month low at 9%, and came up with schemes to ease the liquidity crunch for businesses and provide cheap loans to industrial and construction sectors. In Moody’s view, all this would “further buffer the economic shock related to the coronavirus.”

Recessionary pressure will come from a drop in domestic consumption, halt in tourism – whose share in the GDP stands at 2% – and sluggish exports, but it would be manageable. Pakistan will see economic contraction for the first time in the past 68 years – after 1951-52. However, a gradual recovery in economic activities would help the national economy to grow by more than 2% in fiscal 2021.

On the negative side, Pakistan’s growing need for funds to finance the fight against the health crisis, address hunger and a relief packages announced to support industries, the construction sector and daily-wage earners during the lockdown would increase its fiscal deficit to 9.5-10% of the GDP. As we know, Pakistan’s financing needs have become urgent because of coronavirus-related economic effects and the government’s Rs1.2-trillion ($7 billion, 2.7% of GDP) stimulus package, approved in March.

Moody’s has pointed out that the deficit would surge despite strong growth in revenue collection, which had narrowed the deficit in the first half (Jul-Dec 2019) of the current fiscal year. The government’s revenue in the first half rose almost 40% from a year earlier, with tax revenue up 18% and non-tax revenue more than doubled in part because of higher State Bank of Pakistan profits. But tax revenue is likely to contract in the second half, although higher-than-budgeted central bank profits, lower-than-budgeted interest payments and fiscal savings from lower oil prices will mitigate the effect of the contraction on the deficit,” Moody’s said.

On the other hand, the nationwide lockdown significantly curtailed domestic consumption and posed downside risks to economic growth, which threatened a wider fiscal deficit and a higher government debt burden than currently projected. According to the rating agency, government debt will rise to around 87% of the GDP by June 2020, from around 83% in June 2019, and gradually decline in subsequent years. In fiscal 2021, the deficit is likely to narrow because of the government’s commitment to fiscal consolidation under its IMF programme but remain wide at 8-8.5pc of the GDP.

Last month, the IMF approved the disbursement of $1.4 billion (0.5% of the GDP) to Pakistan under its Rapid Financing Instrument (RFI). The financing supplements the assistance of $588 million (0.2% of the GDP) committed by the Asian Development Bank (ADB) and the International Development Association (IDA) to support Pakistan’s response to the coronavirus outbreak.

At the same time, G20 creditors have offered Pakistan a bilateral debt relief estimated at around $12 billion. The multilateral development banks’ (MDBs) latest financial assistance augments their current funding to Pakistan in various programmes, including the IMF’s Extended Fund Facility and the World Bank’s Revitalising, Innovating, Strengthening Education project. The G20’s recent offer of debt relief to low-income countries will also support Pakistan by deferring principal and interest payments on bilateral debt due between May and December.

It is likely that the deferrals may be extended and involve other creditors. Debt relief by official-sector creditors would provide additional spending capacity for Pakistan, whose interest payments on foreign-currency debt are around 0.6% of the GDP for fiscal 2021. Although the official-sector debt relief would provide some additional fiscal capacity, yet the G20 has also called on private sector creditors to offer comparable relief on a voluntary basis.

All said, Pakistan’s economy is not in such a bad shape as is generally perceived. We are sure to come out of the crisis but much will depend on our capacity to manage our expenditures and stimulate the economy through appropriate fiscal and other measures.