NationalVOLUME 15 ISSUE # 23

Pakistan’s gradual recovery

Pakistan hopes to make a gradual recovery in the new fiscal year after posting –0.4pc growth in the last fiscal year which ended in June 2020. International financial institutions have projected Pakistan to grow at 2pc in the current fiscal year despite looming threats in the wake of the Covid-19 pandemic.

Pakistan’s latest growth projection is an encouraging sign for policymakers as it is to their credit that Pakistan has not suffered as badly as most countries of the world and region. Pakistan’s exports are steadily rising and its current account deficit is on the decline despite the pandemic and lockdown, which belie claims of the opposition and some economists, who continue to paint a bleak picture of the economy.

However, the International Monetary Fund (IMF) sees a gradual recovery in Pakistan in the fiscal year 2021 as the country’s economy reopens after pandemic and subsequent lockdown. In its latest report “Policy Actions Taken by Countries,” it has appreciated Pakistan for various steps it has taken since March to deal with the Covid-19 crisis. Noting that the near-term economic outlook of the country has worsened significantly, and growth estimated at –0.4 per cent in FY 2020, it said since mid-April, the federal government, in coordination with the provinces, has been gradually easing lockdown arrangements, by allowing low-risk industries to restart operation and small retail shops to reopen with newly developed Standard Operating Procedures.

Besides, restrictions on domestic and international movements have been lifted and educational institutes are expected to restart in September. Selective lockdown arrangements remain in place, through the closure of shops on weekends and the sealing of specific areas of high risk. A relief package worth Rs1.2 trillion was announced on March 24, which is now being implemented and will be pursued in the fiscal year 2020-21. The report also recounts and appreciates measures taken by both federal and provincial governments to ease the economic impact of the pandemic. “Key measures by the federal government include elimination of import duties on emergency health equipment; cash transfers to 6.2 million daily wage workers, cash transfers to more than 12m low-income families; accelerated tax refunds to the export industry, out of which 65pc have already been disbursed, and financial support to SMEs and the agriculture sector,” it observed. The provincial governments, according to the report, have been also implementing supportive fiscal measures, consisting of cash grants to the low-income households, tax relief and additional health spending.

The IMF notes that the economic package also earmarks resources for an accelerated procurement of wheat, support for health and food supplies, an emergency contingency fund, and a transfer to the National Disaster Management Authority for the purchase of Covid-19-related equipment. It also mentions the provision of tax incentives to the construction sector to address the acute employment needs generated by the lockdowns.

Earlier, the Asian Development Bank (ADB) projected Pakistan’s economy to regain some pace and grow at 2pc in the new fiscal year 2020-21, after contracting by 0.4pc in the fiscal year 2019-20 in the wake of the pandemic. “Pakistan’s economy was on the path to recovery before Covid-19, and once the Covid-19 impact subsides, Pakistan will resume its efforts to address macroeconomic imbalances and initiate structural reform, likely holding economic growth to a projected 2pc in FY2021,” the bank said. It also projected the inflation rate in Pakistan would remain 8pc against the earlier projection of 8.3pc.

The ADB said that the developing Asia overall would barely grow in 2020 as containment measures to address the coronavirus pandemic hampered economic activity and weakened external demand. It forecast growth of 0.1pc for the region in 2020 – down from the 2.2pc forecast in April. The growth of 0.1pc would be the slowest for the region since 1961. Excluding the newly-industrialised economies of Hong Kong, China; Republic of Korea; Singapore; and Taipei, China, developing Asia is forecast to grow 6.6pc in 2021. “Economies in Asia and the Pacific will continue to feel the blow of the Covid-19 pandemic this year even as lockdowns are slowly eased and select economic activities restart in a new normal scenario. While we see a higher growth outlook for the region in 2021, this is mainly due to weak numbers this year, and this will not be a V-shaped recovery. Governments should undertake policy measures to reduce the negative impact of Covid-19 and ensure that no further waves of outbreaks occur,” ADB Chief Economist Yasuyuki Sawada said in a statement.

Moody’s Investors Service ‑ one of top three global credit rating agencies ‑ also expects Pakistan’s economy to grow by 2-3pc in fiscal 2021, after it contracted by around 1pc in fiscal year 2020. “The economic slowdown will weigh on government revenue and modestly raise spending, in turn pushing the fiscal deficit wider to close to 10pc of GDP in fiscal year 2020. As a result, the government’s debt burden will reach around 85-90pc of GDP in fiscal year 2020. However, the government’s commitment to fiscal reforms, including under its 2019-22 International Monetary Fund (IMF) programme, provides a crucial anchor for the continued expansion of its revenue base when economic activity gradually normalizes,” it observed in its last report.

Moody’s said Pakistan had improved its economic indicators well before the outbreak of Covid-19 late in March and was still capable of continuing to pay off the debt on time. However, the possible deterioration in the country’s current account deficit, likely depletion in its foreign currency reserves and low tax and non-tax revenue collections due to limited economic activities and anticipated contraction in the domestic economy may weaken the government’s ability to continue paying off the debt on time, going forward, the agency said.

The reports of the leading international financial institutions point out that Pakistan had made structural adjustment before the onset of the pandemic and it will start recovering from shocks in a few months as the pandemic has started subsiding and the economy is opening up.