Pakistan’s Gross Domestic Product growth is expected to slow down by 3.4 percent in the fiscal year 2018-2019, from 5.8 percent of previous year to 2.7 percent in FY2019-20, revealing a broad-based decline in domestic demand as both monetary and fiscal policies have been constricted to enclose macroeconomic imbalances, the World Bank said in a report.
The cause of expected slowdown in Pakistan’s GDP growth was cited to be macroeconomic imbalances, reflected in large fiscal and current account deficits as documented in the latest report titled, “South Asia Economic Focus, Exports Wanted.”
The report said, “In Pakistan, external account pressure reduced international reserves to USD 6.6 billion (1.3 months of goods and services import coverage) by mid-January 2019. With short-term financing from the Kingdom of Saudi Arabia, the United Arab Emirates and China, international reserves increased to USD 10.5 billion (2.0 months of goods and services import coverage) at the end of March. Meanwhile, the government continues to negotiate a support package with the International Monetary Fund.”
“The current account deficit continued to widen but stabilized over the course of last year and it stood at 5.2 percent of GDP in the fourth quarter of 2018. The current account deficit reached 8.8 USD billion (3.3 percent of GDP) at the end of February 2019, compared to 11.4 USD billion (3.7 percent of GDP) the year before,” the report added.
Looking upon the inflation, the report detects, “In Pakistan core inflation steadily rose throughout 2018, mostly due to currency pressures which made imported final and intermediate goods more expensive. It reached 8.3 percent (year over year) in December of last year, the highest value since January 2015… Consumer prices increased despite a strong decline in food prices.”
“Inflation increased owing to exchange rate depreciation, demand side pressures and higher fuel prices. Consumer prices rose by 8.2 percent from February 2018 to February 2019, the highest rate in South Asia. Average inflation reached 7.0 percent in the period between October 2018 and February 2019, compared to 4.1 percent in the same period last year,” the report said.
World Bank said, “Pakistan’s currency has continued to depreciate against its trading partners over the last six months. Pakistan’s real effective exchange rate, which is the average of its currency in relation to an index of other major currencies weighted by their relative trade shares and adjusted for inflation differentials, depreciated by nearly 5.5 percent from October 2018 to March of this year. The depreciation against its trading partners increases the price competitiveness of Pakistan’s exports in international markets and makes imports more expensive. Over time, such an adjustment of relative prices is needed if policies are put in place to improve the trade balance.”
The report further elaborated that growth is expected to recover to 4 percent in FY21 as structural reforms take effect and macroeconomic conditions improve. Remittances flows are likely to support the current account balance next year. A more stable external environment will also support a pickup in economic activity starting from FY21. The trade deficit is projected to remain elevated during FY19, but to narrow in FY20 and FY21 as the impacts of currency depreciation, domestic demand compression, and other regulatory measures to curb imports set in.
Illango Patchamuthu, World Bank Country Director for Pakistan had this to say, “Pakistan’s growth must be driven by investment and productivity, which will put an end to the boom and bust cycles that affect the country every few years, It is entirely possible for Pakistan to transform its regulatory environment and reduce the cost of doing business. On the revenue front, reforms to improve tax administration and widen the tax base are critical. Over the adjustment period and beyond, actions outlined in the recently announced Ehsaas Program can protect the poor and vulnerable through social safety nets and safeguarding public spending on health and education.”