NationalVOLUME 15 ISSUE # 19

Pakistan ready for take-off?

Recent reports by two reputable international financial institutions have projected Pakistan’s economy to grow faster than what was expected after the Codid-19 pandemic. The virus has seriously hit Pakistan’s efforts to improve its economy and it still fears the worst economic recession, like most countries of the world and region, if the situation persists. However, Pakistan can hope for better as it has timely taken harsh measure to improve its fundamentals.

In fact, Pakistan’s economy had started showing signs of improvement before the virus hit, with foreign exchange reserves growing steadily, fiscal and current account deficits coming under control, encouraging progress on Financial Action Task Force (FATF) conditions, a stable outlook from global credit rating agencies and confidence provided by an IMF loan programme. “However, the 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 for fiscal year 2019-20 on the state of Pakistan’s economy. The SBP had revised down its projection for economic growth by half a percentage point to 3pc for the current year after infection cases started rising slowly in the country in the second half of March. “The projections are now likely to be revised downward further,” the central bank said.

The economy was poised to take off after three years of slowdown but the pandemic hit people and businesses hard from mid-March. “On the positive side, as a net oil importer, Pakistan would benefit from a substantial decline in global oil prices. Apart from contributing to the SBP’s disinflation efforts, this will further reduce the import bill and the current account deficit. On the negative side, however, the outbreak of the virus in Europe and North America and the ensuing lockdowns may have an adverse impact on Pakistan’s exports,” it added.

The SBP said domestic economic activity and consumer demand were all set to weaken in response to the measures to contain the pandemic, including suspension of domestic and international flight operations and strictly tightened cross-border movement. Domestic exporters have already warned of cancellation of orders as retail sales in foreign markets weaken and port and shipping activities are restricted. Under the circumstances, exporters may face a cash crunch for some time. Remittances from major destinations may decline temporarily in the coming months, with some short-lived downward impact on domestic consumption. Financial markets too have come under severe pressure. The stock market was the hardest hit as domestic investors grew wary of the pandemic’s trajectory.

On the other hand, international financial institutions, like the World Bank, have recently anticipated negative growth of 1.3pc in Pakistan’s economy for the first time in the past 68 years – since 1951-52. While, Moody’s Investors Service – one of the top three global credit rating agencies –anticipated that Pakistan’s economic growth will shrink much less than what the country’s central bank, International Monetary Fund (IMF) and World Bank have projected in response to the coronavirus pandemic. “We expect Pakistan’s real GDP to contract modestly by 0.1-0.5% in fiscal 2020,” said the US-based firm in its latest report. Despite the health challenge, it projected Pakistan’s economy to grow by more than 2pc in fiscal 2021. Forecasting its fiscal deficit to increase by 9.5-10pc of the GDP, it expected general government debt to rise to around 87pc of the GDP by June 2020 from around 83pc in June 2019, but 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 the GDP,” it observed.

The UK-based Economist Intelligence Unit (EIU) has projected Pakistan’s GDP to grow by 2.9pc in 2020-21 and noted that loans from the IMF and other multilateral and bilateral donors would help ease the balance-of-payments pressures in 2020 and over the next few years. In its latest report, it projected unemployment in Pakistan to come down to 11.8pc in 2020-21. “The unemployment rate will further go down to 9.4pc in 2021-22 and stay at the same in 2022-23 and is projected to further decrease to 8.4pc in 2023-24,” it noted. It also forecast inflation to come down to average 7.4pc in 2020, from 9.4pc in 2019. The overall consumer price inflation is expected 6.2pc in 2021-24. The forecast for employment and inflation are really encouraging signs for the people of Pakistan.

Pakistan’s financial indicators had started improving when the pandemic struck. The Swiss financial services firm, Credit Suisse, in its latest report noted that Pakistan’s fundamentals have improved significantly but warned of challenges that lie ahead. Titled “Pakistan: On the path to recovery”, the firm credited the assistance from the International Monetary Fund (IMF), fiscal consolidation, and much needed reforms for the improvement in country’s economic condition. In recent months, international financial institutions recognised Pakistan’s financial progress. Moody’s Investor Service had upgraded Pakistan’s economy outlook from negative to stable in December. The World Bank also acknowledged Pakistan as one of the top 10 “most improved” countries in the Ease of Doing Business Index. Pakistan’s current account deficit had narrowed 75pc to $2.153 billion in the first six months of the current fiscal year as imports of goods declined sharply. Higher foreign investment and increased remittances from Pakistani workers abroad also contributed to the improvement in the current account balance. Exports had increased by 4.5pc to $12.391b in July-December FY20, while imports fell by 20.9pc to $22.2b in the six months of the current fiscal year. Foreign direct investment into Pakistan surged by 68.3pc to $1.340b in July-December FY20. Foreign investment in government securities such as market treasury bills and Pakistan Investment Bonds reached $452.2 million in six months of FY20, compared with $0.1 million a year ago.

In September last year, Pakistan’s current account deficit dropped by 80pc to a 41-month low of $259 million, with a 111.5pc rise in foreign direct investment (FDI) and 194pc increase in private investment. With FDI of $1.34 billion during the first half of the current fiscal year, a 68.3pc increase was registered in January, compared to $796.8 million of the same period of the previous fiscal year. In February, the reserves of the State Bank of Pakistan (SBP) also hit a 21-month high at $11.586 billion. The economic positivity was also reflected by the Karachi Stock Exchange (KSE), which registered a 16-month high in February, crossing the 42,000 point mark after a cumulative increase of 13,000 points in four months.

The fiscal indicators prove that Pakistan was moving ahead with a rapid pace when the pandemic stalled its progress. It is hoped the economy will take off as soon as the situation improves.