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Gloomy economic outlook of Pakistan

Muhammad Javaid
MANY discussions regarding the deteriorating situation of economy have textured since the inception of PTI Government. Subsequently, increase in the price of oil, gas, electricity, medicine and many others caused uproar within the nation. The massive devaluation of Pakistani rupee against US dollar has not given the results as expected. Some measures taken by the Government to improve the economy are not being appreciated. Many people are concerned about how Pakistan will run in the future and what steps should be taken to improve this economic blight. No doubt PTI Government inherited this economic situation but need to articulate for public precisely the existing resources and what is needed for sustainable economy. Currently, Pakistan’s economy is going through a rough patch. Some economic parameters are declining while others remain somewhat stagnant. The resultant situation is worrisome as slow economic growth and increasing fiscal imbalance is preventing the government to cater the needs of the growing population. The recent world economic reports – United Nations, Asian Development Bank and World Bank – endorse gloomy Pakistan’s economic outlook. The World Bank has estimated that GDP growth will decelerate to 3.4 per cent in financial year 2019 and further drop to 2.7 per cent in 2020 as fiscal and monetary policies are tightened. Both the United Nations and the Asian Development Bank reports painted a gloomy picture of Pakistan’s position in the region with regard to its slow GDP growth in 2019. Asian Development Bank (ADB) in a recent report also warned that Pakistan will continue to face macroeconomic challenges despite tight fiscal and monetary policies to rein in twin deficits leading to deceleration of the GDP to 3.9 per cent in the ongoing fiscal year. In its assessment bank warns that “until macroeconomic imbalances are alleviated, the outlook is for slower growth, higher inflation, pressure on currency and heavy external financing is needed to maintain even a minimal cushion of foreign exchange reserves.”
The budget deficit increased from 2.3 per cent of GDP in first half of 2018-19 to 2.7 per cent a year later due to gap in revenue collection and current expenditure. The report pointed out the slow downing the supply side, the agriculture sector is likely to under perform the 3.8 per cent growth target for the ongoing fiscal year. The situation in Large-scale manufacturing is also not appreciable it reversed 6.6per cent growth in the first half of fiscal year 2018 to decline by 1.5 per cent in the same period of fiscal year 2019 as domestic demand contracted and rising world prices crimped demand for raw material. A slowdown growth in agriculture and industry will decrease domestic demand and keep services growth subdued as well. It projected to decline to 4.4 per cent in 2019.The domestic demand is also expected to reduce as a result of the policies. In eight months government borrowed more from the central bank and less from commercial banks freeing up liquidity for commercial banks to increase credit to the private sector by 18.9per cent. This sharply increased net domestic assets and nearly doubled broad money growth to 2.8 per cent. The recent measures to stabilized economy and rising inflation are likely to contain growth in private consumption and investment, while public sector development spending has already slackened. With exchange rate flexibility and declining imports, net exports are expected to contribute to growth. Imports decreased by 0.8 per cent in first seven months whereas exports increased by 1.6 per cent in the same period. It is likely to strengthen in the coming months and further in 2019-20 as lagged impact of currency depreciation and incentive package for export-oriented industries. The reports reveal that country’s exports lack sophistication and diversification condemning them to declining shares in global trade accentuated by the high cost of doing business limiting firms’ ability to compete.
Remittances are expected to continue to play important role. It increased by 10 per cent in first seven months of current fiscal year. The reports further indicate that the flow of remittances is likely to support the current account balance next year. However the foreign direct investment is expected to be lower in current fiscal year as several CPEC energy projects are near to complete. The outlook report reveals that Pakistan lags behind the South Asian regional average on most index indicators; business competitiveness suffers under a challenging macroeconomic environment followed by adverse terms of trade, significantly destroying production and exports. On a positive note, the World Bank (WB) is of the view that structural reforms can revive Pakistan’s growth. The WB is expecting to recover to 4.0 per cent GDP in fiscal year 2021 if macroeconomic conditions improve, and a package of structural reforms in fiscal management and competitiveness is implemented. This baseline scenario assumes stable international oil prices and reduced political and security risks.
The reports reveal that inflation is estimated to rise to 7.1 per cent (average) in 2019 and expected to touch 13.5 per cent in 2020 as a result of further expected exchange rate depreciation. It is forecast that trade deficit will continue to rise in 2019. However it will narrow in the years 2020 and 2021 due to impact of currency depreciation, decrease in domestic. A more stable external environment will also support a pick-up in economic activity starting from 2021. The reports suggest some measure to improve this gloomy picture of economy. World Bank’s Country Director for Pakistan suggested that 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. He further added that 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. The government is in process to improve the economy with a new economic team. After the resignation of Asad Umer, Governor State Bank and Chairperson of Federal Board of Revenue have been removed. Dr Raza Baqir (IMF representative in Egypt) and Shabbar Zaidi (well-known economist)are appointed new Governor of the State Bank of Pakistan and Chairperson of FBR respectively. Mujtaba Memon is being appointed as new Chairman of FBR. Let’s hope new team will be able to takeout from present economic crises.
—The writer is ex-Chief, Planning Commission of Pakistan.