NationalVOLUME 17 ISSUE # 9

Stiff challenges ahead

The Pakistan Tehreek-i-Insaf (PTI) government has set the national growth rate at about 5pc for the current fiscal year. However, international organizations project the growth rate to be less than half of it. Even if the economy grows according to the government’s estimates, it will fail to meet the needs of the majority of the people who have suffered huge job and income losses.

The country has seen the highest inflation in its history in the PTI government, with millions of people losing jobs and facing income cuts even before the onset of the pandemic. The pandemic aggravated the losses. The national economy may be recovering but people are still suffering. Bad governance has compounded the situation. However, according to the Pakistan Development Update of the World Bank, Pakistan’s economic growth will strengthen to an average of 2.7pc for FY2022-23. The baseline economic growth forecast, however, is highly uncertain, especially given the third and more-contagious wave of the pandemic currently circulating in the country, it warned. “It is crucial to sustain the positive reform momentum to continue to boost the competitiveness of Pakistan’s economy and lay a strong foundation for a more robust, inclusive and sustainable recovery. Increasing competitiveness and stimulating private investment and exports will require continued macroeconomic stability, maintenance of a market-determined exchange rate, and improving the business environment to enable all firms, particularly SMEs, to access markets and compete openly in a leveled playing field. The potential for a strong recovery and a growth acceleration is there. Reforms to make it happen need to be further sustained,” said Najy Benhassine, World Bank Country Director for Pakistan.

On the other hand, the Asian Development Bank projected Pakistan’s GDP at 4pc for the current year, though 2pc more than World Bank estimates but still one percent less than what is budgeted. The State Bank of Pakistan has projected the economy to grow strongly in the range of four to five per cent in the current fiscal year 2021-22, but warned of challenges including exponentially high global commodity prices, elevated import payments, increase in utility tariffs, higher inflation and expansion in services deficit. In its annual report, the SBP economic outlook said economic recovery during FY21 was projected to gain further momentum in FY22. The momentum in growth is evident from the significant increase in machinery and raw material imports, continued expansion in consumer financing, and strong uptrend in domestic sales as seen from high frequency demand indicators during the initial months of FY22.

According to the government’s estimates, Consumer Price Index (CPI) inflation is expected to remain within a range of 7-9pc. The SBP recommended that better commodity management practices, especially the build-up of reserves for wheat and sugar, would likely contain supply side pressures from seeping into inflation during FY22. Importantly, headline inflation is expected to retreat more visibly in the second half of the year, with the phasing out of the base impact of hike in power tariffs. “These projections are subject to multiple upside risks, including from a greater-than-anticipated increase in global commodity prices and upward revision in utility tariffs. In addition to triggering a sharp increase in domestic prices, these developments may also give rise to significant second-round impacts on inflation,” the report said.

In the external sector, pressures from the import side are emerging, with payments exceeding $6 billion in June, August and September. The surge in imports is broad-based, partly reflecting the increasing pace of economic activity, a further increase in global commodity prices, continued imports of agricultural commodities, automobiles, and many consumption related items. According to the SBP, the current account deficit is projected in the range of 2-3pc of the GDP during FY22.

In its report, the World Bank said Pakistan’s economy has been growing slowly over the past two decades. Annual per capita growth has averaged only 2pc, less than half of the South Asia average, partly due to inconsistent macroeconomic policies and an under-reliance on investment and exports to drive economic growth. Short periods of rapid consumption-fueled growth frequently led to sizable current account and fiscal deficits that ultimately required policy tightening, resulting in recurrent boom-bust cycles. In early FY20, following one such episode of external and fiscal imbalances, the country entered a 39-month IMF-Extended Fund Facility. The associated adjustment measures, including fiscal consolidation, contributed to a reduction of the imbalances over the year and improved macroeconomic stability.

However, the containment measures adopted in response to the COVID-19 pandemic led to a severe contraction in economic activity during the final quarter of FY20. Half of the working population saw either job or income losses, with informal and low-skilled workers employed in elementary occupations facing the strongest loss in employment. As a result, poverty incidence is estimated to have increased in FY20 from 4.4 to 5.4pc, using the international poverty line of $1.90 PPP 2011 per day, with more than two million people falling below this poverty line. Moreover, 40pc of households suffered from moderate to severe food insecurity.

It noted that over the first half of FY21, there have been signs of a fragile recovery. With increased community mobility, private consumption has strengthened, aided by record official remittance inflows. Investment is also estimated to have slightly recovered, as machinery imports and cement sales both recorded double-digit growth rates. On the production side, crop production was relatively weak in the first six months of FY21, as cotton production was adversely affected by heavy monsoon floods. Following the phased lifting of lockdown measures from May 2020 onwards, indicators of industrial and services activity have recovered, with “Large Scale Manufacturing” and business confidence indexes exceeding pre-COVID levels in December 2020. As a result, the majority of the informal workers affected by the crisis are expected to have been able to return to work.

The fiscal deficit widened over the first six months of FY21 (y-o-y), as expenditure growth outpaced an increase in revenues. In line with the recovery of economic activity, total revenues grew by 3.7pc. Over the same period, total expenditures rose by 6.2pc, partly driven by higher interest payments. Public debt, including guaranteed debt, reached 87.9pc of GDP at end-December 2020, up from 86.7pc of GDP at end-December 2019. Output growth is expected to recover gradually over the medium-term, averaging 2.2 percent over FY21-23, mostly due to contributions from private consumption. However, sectors that employ the poorest, such as agriculture, are expected to remain weak, and therefore poverty is likely to remain high.

Major risks to the WB outlook include the possibility of new waves of infections, the emergence of new vaccine-resistant strains, and setbacks in mass vaccinations. In addition, more delays in the implementation of critical structural reforms could lead to further fiscal and macroeconomic imbalances. According to the IMF, as the recovery gains strength, it will be important to accelerate the implementation of policies and reforms needed to address some of the long-standing challenges facing the Pakistani economy. Moody’s, in its latest report, said that Pakistan’s economy had the potential to grow at an annual rate of 4pc. Fitch Ratings awarded Pakistan ‘B-‘ rating, which reflects weak public finances, external finance vulnerabilities, and low governance indicator scores. “The authorities have made progress in addressing external and public finance challenges over the past few years, despite the headwinds from the Covid-19 pandemic. However, economic uncertainties from the pandemic and political challenges to keeping the reform agenda on track pose risks,” it observed.

Undoubtedly, Pakistan still faces grave challenges and the economy will take years to recover. However, the government wants to create an impression that it has put the country on the road to quick prosperity. It has taken really harsh measures to improve the economy in the last three years, but it hurt the common people badly. Now it has relaxed its policy in a bid to win the next election. All past governments did the same. They relaxed fiscal discipline to woo voters ahead of polls but the country suffered in the end.