Pakistan GDP growth to restrict at 2.7pc in FY20: Fitch Solutions

Experts believe that investment into the CPEC will continue to provide some support to the economy.

ISLAMABAD (Dunya News) – Fitch Solutions, a US-based global research house, has revised down Pakistan’s economic growth to 2.7% for the next fiscal year 2019-20 from a previously quoted estimate of 4%.

Fitch Solutions, an arm of Fitch Rating Agency, expects that Pakistan will adopt a tight monetary and fiscal policy stance based on a condition that the country is entering into an International Monetary Fund (IMF) programme.

Consequently, this would curtail the economic growth, determined Fitch, thus leading the state to revise the GDP targets for the fiscal years 2018-19 and 2019-20 to 3.2 percent and 2.7 percent, respectively.

That being said, experts believe that investment into the China-Pakistan Economic Corridor (CPEC) will continue to provide some support to the economy.

Fitch pointed out that following the agreement on a $6 billion bailout package to address the country’s balance of payment crisis, the State Bank of Pakistan (SBP) increased the policy rate by 150 basis points, adding that shortly afterwards, the Ministry of Finance of Pakistan also presented a budget with the aim of trimming Pakistan’s primary deficit to 0.6% of GDP in FY19/20, from 1.9% of GDP in FY18/19 as per IMF’s estimates.

In this regard, the report said that higher taxes will erode the purchasing power which in turn would slowdown consumption growth to 5.3% in FY20, down from 6.3% in FY18.

The consumption currently stands at around 82% of the GDP.

“Given our expectations for continued upside pressure on consumer prices over the coming months, we believe that the consumers’ purchasing power will continue to fall over the coming months, thereby weighing on consumption,” according to the report.

Inflation has been on the rise in Pakistan, increasing by 9.1 percent on a yearly basis in May, as compared to 4.2 percent in the previous year.

However, they haven’t overlooked the possibility that some of the effect of price hikes will be partially offset by the government’s populist measures, such as providing electricity subsidies to consumers who use less than 300 units of electricity per month.

Following this, Fitch Solutions has also forecasted a government spending (around 12% of GDP) to slow in growth to 6.4% in FY19/20, down from 14.2% in FY17/18, as the country embarks on an austerity drive.

“IMF bailout packages typically require countries to undergo fiscal consolidation, which usually include the IMF have agreed on focusing on tax-based measures to manage the fiscal deficit, according to media reports, we believe that the Pakistani government will fall short of its ambitious revenue targets and will likely have to cut spending to meet the primary deficit target of 0.6% of GDP,” the report adds.

Moreover, the report sees little improvement in Pakistan’s net exports, which recorded a deficit of around 11 percent of GDP in FY17/18.

Analysts at Fitch Solutions believe that despite the government’s efforts to increase export competitiveness, such as subsidizing electricity and gas to the industrial and export sectors, a global slowdown will likely weigh on exports over the coming months.

“Our view is for global growth to slow from 3.2% in 2018 to 2.9% by 2020, with growth in two of the largest main export destinations, the US and China, slowing to 2.0% and 6.1% respectively by 2020, from 2.9% and 6.6% in 2018. Moreover, we believe that imports could increase over the coming months acting as a slight drag on growth.”

Given that Pakistan’s main imports are petroleum and its products (around 28% of total imports), rising oil prices will likely weigh on net exports. Fitch’s Oil and Gas team forecasts Brent Crude oil prices to average USD70/barrel (bbl) in 2019 and USD76/bbl in 2020, from a year-to-date average of USD66.15/bbl.

In addition to this, it has been forecasted that the impact of rising oil prices on imports will be exacerbated by a weakening currency.

Following the agreement with the IMF, the Pakistani rupee has been devalued by more than 10% to around PKR157/USD, at the time of writing, from around PKR142/USD before the agreement took place in May.

“We believe that investment, which accounts for approximately 17% of GDP, will slow in growth to 5.1% in FY19/20, from 5.7% in FY17/18, as tighter monetary policy implemented by the SBP will likely weigh on investment,” the report states.

Moreover, the government has committed to borrow less from the SBP as part of the IMF deal, which will improve the monetary policy transmission in the country, believes Fitch. In addition, business sentiment will likely remain subdued in Pakistan, leading to slower investment growth.

“With a slowdown of manufacturing activity, we expect to see a fall in investment appetite related to LSM industries, such as investment in capital goods,” concluded Fitch Solutions.

Pakistan’s Karachi Stock Exchange-100 index has already fallen by more than 14pc since July 2018, reaching the lowest levels since March 2016, suggesting that investor confidence in the economy has fallen. The large-scale manufacturing (LSM) industries have also been contracting over the past few months, with the quantum index recording a 6.7% yearly decline in March. With a slowdown of manufacturing activity, we expect to see a fall in investment appetite related to LSM industries, such as investment in capital goods.