World Bank predicts more inflation in Pakistan in FY20
"GDP growth decelerated to 3.3 percent in FY19 2.2 percentage points lower than FY18."
(Web Desk) – The World Bank has forecasted Pakistan’s economic growth to slow down for the next two years as it faces yet another macroeconomic crisis due to massive twin deficits and low foreign reserves, according to a report entitled “South Asia Focus: Making (De)centralisation Work” released from Washington on Sunday.
The WB, in its annual flagship report, further notes that Prime Minister Imran Khan’s government would miss inflation, public debt, and fiscal deficit reduction targets, while underlining major challenges that the government will encounter at least till the end of the third year in power.
“GDP growth (at factor cost) decelerated to 3.3 percent in FY19 – 2.2 percentage points lower than FY18 - as gradual policy adjustments to tackle macroeconomic imbalances started to take effect. These adjustments included a tightened monetary stance, cuts in public sector development expenditures, and enhanced focus on higher tax collections. As a result, large scale manufacturing, which accounts for half of overall industrial output, contracted by 3.6 percent in FY19. The services sector, which contributes over 60 percent to total output, decelerated to 4.7 percent in FY19 compared to 6.2 percent last year.”
It observes that despite of having an IMF extended fund facility, the country’s economic growth was expected to remain low in the near term and that Pakistan’s economic behaviour is different than all the other South Asian nations.
“The medium-term growth outlook hinges upon the country’s ability to implement necessary structural reforms to boost competitiveness and achieve sustained growth. Progress in poverty reduction is expected to be limited during the macroeconomic adjustment period.”
According to the report, measures to restore macroeconomic stability in Pakistan weigh heavily on growth, which is expected to have dropped to 3.3 per cent.
“Economic policies over the past few years have resulted in increased debt levels and an erosion of fiscal and external buffers, affecting the economy’s ability to absorb shocks. The country needs to restore these buffers, especially because turbulence in global financial markets could affect the country’s access to private external financing. And the weakening global economy and rising trade tensions could dampen external demand.”
“Increased pressures on the asset quality and capital adequacy buffers due to the economic slowdown and inflationary environment could hold back the forecast rebound in growth, especially when strong short-term deposit mobilisation due to recent increases in policy rates continues to be intermediated mostly towards government securities,” said the report.
The main domestic risk emerges from potential difficulties in implementing the necessary adjustments and structural reforms. The vulnerable households’ ability to weather the economic impact of the crisis will depend on the inclusiveness of growth, the food and non-food inflation, and the resilience of sectors relevant for their employment — agriculture, construction and wholesale and retail trade.
Regarding the outlook, the report said growth was projected to decelerate to 2.4 per cent in the fiscal year 2020, with continued fiscal consolidation and a tight monetary policy stance. The IMF adjustment programme entailed a rebalancing from domestic to external demand.
The report said growth was expected to recover slowly, to 3pc in fiscal year 2021, as macroeconomic conditions improved and external demand picked up on the back of structural reforms and increased competitiveness. This recovery was conditional on relatively stable global markets, a decline in international oil prices and reduced political and security risks, said the report.
Inflation is expected to increase in fiscal year 2020 to 13pc but it will start declining afterwards. The increase in prices will be driven by the second-round impact of exchange rate pass-through to domestic prices.
Despite significant devaluation, the WB still sees the Pakistan rupee overvalued by the end of September by approximately 4.8%.
Pakistan, similar to many South Asian countries, is growing half of its potential and in the fiscal year 2019-20, it would grow at a rate of only 2.4%, according to the WB report. The forecast is in line with the Ministry of Finance and the IMF projections.
“In Pakistan, growth is projected to deteriorate further to 2.4% this fiscal year, as monetary policy remains tight, and the planned fiscal consolidation will compress domestic demand,” said the WB.
It added that economic growth is expected to recover slowly, to just 3% in the next fiscal year 2020-21, as macroeconomic conditions improve and external demand picks up on the back of structural reforms and increased competitiveness.
The WB said the IMF programme is expected to help growth recover from the fiscal year 2021-22 onwards. But this recovery is conditional to relatively stable global markets, a decline in international oil prices and reduced political and security risks. In April, the WB had predicted Pakistan’s economy to grow by 2.7% in this fiscal year and 3.9% in the next fiscal year.
Twin deficits
“The current account deficit is expected to decline to 2.6 percent of GDP in FY20 and further to 2.2 percent of GDP in FY21, as increased exchange-rate flexibility will support a modest recovery in exports and rationalization of imports.”
“The consolidated fiscal deficit (including grants) is projected to reach 7.5 percent of GDP in FY20 and remain elevated at 6.2 percent of GDP in FY21. The public debt-to-GDP ratio is expected to remain high in FY21 at 80.8 percent, increasing Pakistan’s exposure to debt-related shocks. Fiscal consolidation across the federation will be needed for the public debt to decline, but the debt-to GDP ratio is not expected to fall below 70 percent of GDP - the debt burden benchmark for high risk emerging markets – over the medium term. Pakistan’s debt vulnerabilities will remain high due to large foreign currency debt amortizations and sizeable refinancing of short-term domestic debt,” it observes.
“Progress in poverty reduction, which was uninterrupted since 2001, is expected to stall during the macroeconomic adjustment period, due to decelerating growth and higher inflation rates. The poverty headcount, measured using the USD 1.90 per person per day international poverty line, is projected to remain at the FY19 level (3.1 percent). Poverty measured using the USD 3.2 line is expected to decline from 31.4 percent last year to 31.2 percent in FY20, while poverty measured using the USD 5.5 poverty line is projected at 72.5 percent in FY20, compared to 72.6 in FY19.”
Poverty
“Progress in poverty reduction is expected to be limited during the macroeconomic adjustment period […] progress in poverty reduction which was uninterrupted since 2001, is expected to stall during the macroeconomic adjustment period, due to decelerating growth and higher inflation rates”.
The poverty headcount, measured using the USD 1.90 per person per day international poverty line, is projected to remain at the last fiscal year level of 3.1%. The poverty measured using the USD 3.2 line is expected to decline from 31.4% last year to 31.2% in FY20, while poverty measured using the USD 5.5 poverty line is projected at 72.5% in this fiscal year, compared to 72.6% in last fiscal year.
The report underscored that vulnerable households’ ability to weather the economic impact of the crisis will depend critically on the inclusiveness of growth, food and non-food inflation, and the resilience of sectors relevant for their employment, agriculture, construction, and wholesale/retail trade. However, the report said the government would miss all these sectorial targets for this fiscal year.
Besides, the WB maintains that the exports of other countries in South Asia continued accelerating in the first quarter of this year, but export growth moderated strongly in India in the second quarter. Import growth, on the other hand, has declined severely across countries in South Asia, and imports even contracted between 15pc and 20pc year-on-year in Pakistan and Sri Lanka, according to the report.
Other South Asian states
“Across South Asia, food prices have been increasing in the last few months. Food prices in 2018 were stable in Pakistan, Afghanistan and Nepal but fell in India, Maldives and Sri Lanka. However, food prices recently have been increasing in all countries except Sri Lanka.”
“In Pakistan, Afghanistan, Nepal and Bangladesh, food prices are more than 6pc higher than a year ago.”
“The FDI flows, on the other hand, were mostly flat in South Asia, with Pakistan being the only exception with a continuous fall since 2018”. Inflation was below target in India and Sri Lanka, but above in Pakistan.
“South Asian nations are cutting interest rates while Pakistan, on the other hand, has now increased its main policy rate nine times since the beginning of last year.” The last increase took place in July, when the SBP increased its rate by 100 basis points to 13.25%, due to high inflationary and external pressures.
“Declining industrial production and imports, as well as tensions in the financial markets, reveal a sharp economic slowdown in South Asia,” said WB Vice President for the South Asia Region Hartwig Schafer.
Suggesting that it is losing its shine, the report says economic activity is moderating in many South Asian countries in line with global developments. Most South Asian countries are expected to grow below long-run averages this year.
