Fitch revises Pakistan’s real growth at 1.1pc amid strong external demand

Pakistan's real GDP is forecasted to be 1.1 percent in FY2020/21 (July -June), says Fitch Solutions on the back of stronger than expected external demand in recent months. Fitch has revised its forecast from the previous 0.8pc.

The Fitch Solutions is its latest Pakistan Country Risk Report- Q2 2021 states that a very likely rebound in the global economy along with a global vaccine rollout will also bode well for exports which will in turn feed into private consumption through better employment prospects in export related sectors. “However, we note that Pakistan economic recovery will remain slow as ongoing spread of COVID-19 will continue to see partial lockdowns in affected areas.”

Fitch highlighted that a likely worsening of ties with Saudi Arabia will post downside risk to Pakistan's balance of payments. “We expect Pakistan to gradually grow closer to Saudi Arabia rival Turkey and Iran as it seeks greater political support over its tensions with India. This would require a delicate balancing and risks angering Saudi Arabia while still being economically reliant on the kingdom. Saudi Arabia could be increasingly reluctant to provide aid, be it in the form of loan or oil credit facility to help ease Pakistan's external debt repayment pressure.”

The report expect the State Bank of Pakistan (SBP) to maintain its benchmark policy rate at 7pc until the end of FY2020/21.

“In our view the central bank will seek to support growth by retaining its current policy stance, which is already loser that it had been over the past two years as economic recovery in Pakistan will remain bumpy especially in the absence of a vaccine. That said SBP will have limited room to ease its monetary policy further as inflation will most likely remain in the upper half of the SBP target inflation range of 7 to 9%.”

The report forecast the Pakistani rupee to average PKR164/USD in 2021 from PKR171.15/USD previously with the recent rupee strength.

Regarding domestic political uncertainty, the report was of the view that the anti-government protest led by almost all major opposition parties are unlikely to oust the government given that Prime Minister Imran Khan and his coalition government still commands an absolute majority in parliament.

“The mounting political challenges would see the Khan administration become more vulnerable to public pressure having already reversed plans to set up a fence around Gwadar port, aimed at protecting Chinese assets from terrorist attacks following protest from locals.” The report said that the protest however, would pose little risk to the China Pakistan Economic Corridor (CPEC) and Pakistan relations with China given that Pakistan's economy is increasingly reliant on China.