The World Bank has forecasted that Pakistan''s economic growth will slow down to 3.4 percent during current fiscal and will further decelerate to 2.7 percent in 2019-2020, as fiscal and monetary policies are tightened to address macroeconomic imbalances. Pakistan''s GDP growth is projected to slow down to 3.4 percent in fiscal year 2018-19, from 5.8 percent a year before, reflecting a broad-based weakening in domestic demand as monetary and fiscal policies have been tightened to contain macroeconomic imbalances, said World Bank''s ''South Asia Economic Focus, Exports Wanted'' report released on Sunday.
In Pakistan, GDP growth is expected to further slow to 2.7 percent in 2019-2020, as domestic demand remains depressed. Macroeconomic imbalances, reflected in large fiscal and current account deficits, are expected to resolve gradually. Remittances flows are likely to support growth and the current account balance next year
South Asia holds on to its top spot as the world''s fastest growing region, with growth set to step up to 7.0 percent in 2019, then 7.1 percent in 2020 and 2021, but the region needs to increase its exports to sustain its high growth and reach its full economic potential, says the World Bank in its twice-a-year regional economic update.
Domestic demand is expected to contract while at the same time export growth will be gradual. On the supply side, services growth, which has been leading growth in the past, is projected to decline to 4.4 percent in FY19 compared to 6.4 percent in FY18. The agriculture and industrial sectors will also grow significantly lower in FY19 and FY20.
Growth is expected to recover to 4% in FY21 as structural reforms take effect and macroeconomic conditions improve.Remittances flows are likely to support the current account balance next year. A more stable external environment will also support a pickup in economic activity starting from FY21. The trade deficit is projected to remain elevated during FY19, but to narrow in FY20 and FY21 as the impacts of currency depreciation, domestic demand compression, and other regulatory measures to curb imports set in.
"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," said Illango Patchamuthu, World Bank Country Director for Pakistan. "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. Over the adjustment period and beyond, actions outlined in the recently announced Ehsaas Program can protect the poor and vulnerable through social safety nets and safeguarding public spending on health and education."
Across South Asia, imports grew much stronger than exports in the last two years, reversing the region''s exports dynamics of the early 2000s. Strong domestic demand, fueled by a consumption and investment boom, resulted in high import growth of 14.9 percent in 2017 and 15.6 percent in 2018, which is nearly twice as high as the region''s export growth. In comparison, exports grew by only 4.6 percent in 2017 and 9.7 percent in 2018.
"There''s no single solution that can unleash South Asia''s export potential and policymakers need to implement an ambitious range of reforms that can turn the region into the world''s next export powerhouse," said Hans Timmer, World Bank Chief Economist for the South Asia Region. "Efforts should include trade liberalization, spurring entrepreneurship, and equipping citizens with the skills they need to compete on the global market. It would be good to be creative and relentless in all these efforts".
Regarding the stock prices in region the report said that in March of last year, stock prices declined by 14 percent in Pakistan and in Sri Lanka and in both countries the decline continued over the course of the last six months. In Pakistan, stock prices declined strongly between April and July due to growing concerns about external imbalances and political uncertainty ahead of the July elections. After a short recovery, the Karachi Stock Exchange (KSE) index dropped to its lowest level since May 2016 in October, as investors continued to pull out amid economic uncertainty. Yet, prices jumped strongly within the first 10 minutes of trading on October 24, following a USD 6 billion bailout package from Saudi Arabia that boosted investor confidence. Since then, however, the downward trend continued due to the unresolved macroeconomic imbalances.
In Pakistan, the current account deficit continued to widen but stabilized over the course of last year and it stood at 5.2 percent of GDP in the fourth quarter of 2018. The current account deficit reached 8.8 USD billion (3.3 percent of GDP) at the end of February 2019, compared to 11.4 USD billion (3.7 percent of GDP) the year before.
Pakistan''s currency has continued to depreciate against its trading partners over the last six months and the depreciation was highest among the region. South Asian currencies depreciated strongly against the USD over the last twelve months, but some currencies have appreciated slightly over the last six months. Apart from the Maldivian rufiyaa (fixed against the USD), all currencies in South Asia depreciated against the USD in 2018. The depreciation was around 8 percent in Afghanistan, Bhutan and India, 10 percent in Nepal, 14 percent in Sri Lanka, and over 20 percent in Pakistan.
Over the last six months the depreciation continued in Pakistan and Sri Lanka, but not in the other countries and in Sri Lanka the rupee appreciated from January to March this year. The Indian rupee appreciated 1.9 percent against the USD from September 2018 to February 2019. On positive side the report said that The depreciation against its trading partners increases the price competitiveness of Pakistan''s exports in international markets and makes imports more expensive. Over time, such an adjustment of relative prices is needed if policies are put in place to mprove the trade balance.
In Pakistan, import growth came down dramatically and exports grew faster than imports in all four quarters of 2018. Regulatory duties imposed on ''luxury items'', combined with the imposition of a ban on imports of furnace oil were among the policy responses to curb imports in Pakistan. However, exports grew below 5 percent in the third quarter and not at all in the fourth.
Regarding trade tension between India and Pakistan, the report said that After the Pulwama incident, India has withdrawn the most favored nation (MFN) status for Pakistan and raised custom duties on all goods imported from Pakistan to 200 percent. This may lead to a significant drop in Pakistani exports to India. However, Pakistan''s exports to India are worth only USD 560 million. Pakistan may still impose retaliatory tariffs on Indian goods or expand its negative list prohibiting specific imports from India. Such retaliatory tariffs could jeopardize Indian exports, which are worth USD 1.8 billion. But since the bilateral trade between the two countries barely reaches USD 2.4 billion, the negative effects from an escalation of trade tensions are limited. However, they would prevent the two countries from moving closer to their high trade potential.
On remittance the report said that Apart from Sri Lanka, remittances increased in 2017 and they kept increasing last year. In India, they increased by over 30 percent (y-o-y) in the third quarter of 2018 compared to a year ago, and in Bangladesh and Pakistan they grew over 10 percent. But remittances growth slowed in the fourth quarter.
In Pakistan, external account pressure reduced international reserves to USD 6.6 billion (1.3 months of goods and services import coverage) by mid-January 2019. With short-term financing from the Kingdom of Saudi Arabia, the United Arab Emirates and China, international reserves increased to USD 10.5 billion (2.0 months of goods and services import coverage) at the end of March. Meanwhile, the government continues to negotiate a support package with the International Monetary Fund.
In Pakistan core inflation steadily rose throughout 2018, mostly due to currency pres sures which made imported final and intermediate goods more expensive. It reached 8.3 percent (y-o-y) in December of last year, the highest value since January 2015. Reserve coverage is a little bit lower than a year ago in Bangladesh and India but remains at comfortable levels there. Sri Lanka''s reserves cover only 2.8 months of imports, and the country faces large repayments soon. In Pakistan, the reserve coverage deteriorated further.
In most countries, lower food price inflation led also to lower overall inflation. In Pakistan, on the other hand, consumer prices increased despite a strong decline in food prices.
Core inflation, which measures the costs of goods and services excluding food and energy, increased steadily in Pakistan and Bangladesh and picked up recently in Sri Lanka. In India, on the other hand, it is very stable. Consumer price inflation is around or below 3 percent in most countries but 5.5 percent in Bangladesh and 8.2 percent in Pakistan. Inflation decreased strongly in India and Sri Lanka and nearly doubled in Pakistan. Inflation is now below target in Sri Lanka and India but above target in Pakistan.
While the world average is 22 percent, goods exports are only around 13 percent in Sri Lanka, Bangladesh, and India, around 8 percent in Afghanistan and Pakistan and even lower in Maldives and Nepal.