ISLAMABAD: The World Bank has said that Pakistan’s ability to withstand external shocks has diminished and risks will remain predominantly on the downside with declining reserves and elevated debt ratios.

In its South Asia Economic Focus titled ‘Budget Crunch’ released on Sunday, the World Bank says appropriate policy responses to correct these imbalances and increased buffers to absorb future shocks will reduce these risks and support a positive growth outlook.

Such responses would entail increased flexibility of the exchange rate, strengthening the fiscal position through renewed efforts to improve revenue collection and better coordination between federal and provincial governments to reduce public spending, the report says.

World Bank suggests immediate macroeconomic adjustments to correct large deficits

The country’s macroeconomic situation remains fragile. Consumption-led growth is expected to slow down due to fiscal and possibly monetary tightening. However, short-term measures for fiscal consolidation and export growth need to be complemented with implementation of medium-term structural reforms to uplift the economy out of frequent boom-and-bust cycles.

The report suggests that immediate macroeconomic adjustments are required to correct the large deficits. Rising global interest rates and tighter liquidity situation will pose challenges to Pakistan given the high gross external financing requirements.

The World Bank projected GDP growth to decelerate to 4.8 per cent in fiscal year 2019 as authorities are expected to tighten fiscal policy to correct imbalances. However, growth is expected to recover in fiscal year 2020 and reach 5.2pc as macroeconomic conditions improve. This recovery is conditional upon the restoration of macroeconomic stability, a supportive external environment, including relatively stable international oil prices, and a strong recovery in exports.

Inflation is expected to rise to 8pc (average) in 2019 and remain high in 2020, driven by exchange rate pass through to domestic prices and a moderate increase in international oil prices. The pressure on the current account is expected to persist and the trade deficit is projected to remain elevated over the next two years.

Remittances will continue to partly finance the current account deficit, although slower growth in member countries of the Gulf Cooperation Council will affect remittances. Foreign direct investment, multilateral, bilateral, and private debt-creating flows are expected to be the main financing sources in the near to medium term. The fiscal deficit is projected to narrow in 2019 due to post-election adjustments and some fiscal measures.

It is expected that there will be some scaling down of public investment spending at the federal and provincial levels, and increase in revenue collection through tax base expansion and other administrative measures.

Fiscal consolidation would improve debt dynamics, but the public debt-to-GDP ratio is expected to stay around 70pc of GDP during 2019 and 2020.

Growth deceleration and higher inflation are expected to slowdown poverty reduction in fiscal year 2019, though overall poverty decline is projected to continue reflecting GDP growth. The presence of safety net programmes will mitigate the negative impact of inflation on poverty.

The current account deficit increased to 5.8pc of GDP in fiscal year 2018, up from 4.1pc in fiscal year 2017. The widening current account deficit reflects the growing trade deficit as exports are not growing as fast as imports. Imports are growing fast due to high domestic demand and import-intensive investments related to the China-Pakistan Economic Corridor.

The State Bank intervened heavily in the foreign exchange market in the first half of 2018 to maintain the value of the rupee, resulting in a large decline in international reserves from $16.1 billion (2.9 months of imports) at end-June 2017 to $10.2bn (or 1.7 months of imports) by Aug 24, 2018.

Under intense market pressure, the currency depreciated by almost 18pc between Dec 1, 2017, and July 25, 2018. Post-election, with emerging political certainty, the rupee recovered three percentage points against the US dollar and was trading at Rs124.3 per dollar on Sept 7.

The fiscal deficit has widened over the past two years — reversing fiscal consolidation efforts in previous years and raising public debt levels. The 2018 fiscal deficit (including grants) reached 6.5pc of GDP — a slippage of 2.5 percentage points compared to the budget target. This was due to limited revenue growth and large increases in recurrent spending at both the federal and provincial levels.

Consequently, Pakistan’s public debt reached 73.5pc of GDP by end-June 2018, significantly raising debt-related risks. The newly elected government recognises the need for macroeconomic adjustments to overcome these challenges and has already announced its plans to cut expenditures, improve the management of state-owned enterprises, and undertake revenue mobilisation reforms, the report says.

Published in Dawn, October 8th, 2018

6.png

login with social account

Images of Kids

Events Gallery

Currency Rate

/images/banners/muzainirate.jpg

 

As of Mon, 10 Dec 2018 19:25:39 GMT

1000 PKR = 2.242 KWD
1 KWD = 446.090 PKR

Al Muzaini Exchange Company

Go to top