The Asian Development Bank has in its recent publication 'Development Outlook' presented a somewhat sombre picture of the prospects for the economy of Pakistan in 2019-20. The GDP growth rate is projected at 2.8 percent while the inflation rate is expected to average 12 percent during the year. These are not very far from the earlier projection by the IMF of 2.4 percent GDP growth and inflation at 13 percent in 2019-20.
There is need to emphasize that there are a large number of factors that will determine the macroeconomic outcome this year. As such, there are many risks and uncertainties about how events will unfold during 2019-20.These are identified below:
(i) The world economy is showing an increasing tendency to slide into a recession, caused primarily by the US-China trade war. This could adversely affect the prospects for Pakistan's exports. However, the fall in international prices will contain the value of imports. Already, in the first two months of 2019-20, there has been a fall of 5 percent on average in the price of Pakistan's imports.
(ii) There is considerable uncertainty about the price of oil. The attack on Saudi oil production had led to a precipitate jump in the price to over $72 per barrel. Following the increased supply by the USA the price has come down by almost $10per barrel. With the onset of the global recession the price could fall even further.
(iii) The regional situation has become more precarious for Pakistan. The annexation by India of Jammu and Kashmir has increased tensions greatly. Clearly, the Armed Forces have to be prepared for any eventuality. This will require a higher level of military preparedness and a consequential enhancement in defense spending. Conditions are also likely to deteriorate in Afghanistan following the breakdown of peace talks with spillover effects on Pakistan.
(iv) Internally, the political situation remains polarized between the Government and the opposition parties. The accountability process continues in an unrelenting fashion. Even leading business persons are being subjected to scrutiny. The possible launching of a protest movement later this year will further exacerbate the economic situation.
(v) There is considerable uncertainty about the growth of FBR revenues in 2019-20. The growth in the first quarter has probably not been much above 15 percent. Hopefully, there will be some improvement later this year as the reforms implemented could start delivering more revenues. However, it is unlikely that the growth rate will exceed 25 percent in the full year. This will imply a shortfall of over Rs 750 billion.
There is the question of how the IMF review mission will react to the failure to meet the quarterly primary deficit performance criterion due largely to a big shortfall in revenues. Will this necessitate a resort to a mini-budget later this year or in the earlier part of 2020 with additional taxation and/or expenditure cuts? Alternatively, will the targets be revised downwards by the IMF especially in light of the wrong benchmark magnitudes of 2018-19?
(vi) The path in coming months of the exchange rate and the policy rate is also uncertain. In recent weeks, the rupee has demonstrated some robustness and its value has appreciated. The recent meeting of the Monetary Policy Committee of the SBP has left the policy rate unchanged. On the positive side, the current account deficit has been more than halved in the first two months. However, the inflation rate continues to rise and has gone above a double-digit rate, even with the new CPI.
(vii) The buildup of foreign exchange reserves by the end of the first year of the IMF Programme is expected to lead to the level approaching $11 billion by end-June 2020, thereby providing for at least two months import cover. This outcome hinges on a gross inflow of external borrowing of over $20 billion. This will require the successful flotation of $2 billion of Euro/Sukuk bonds, $3 billion borrowing from international commercial banks, budgetary support of $5 billion from friendly countries and so on. Will this target be met in the presence of an IMF programme or will the perceptions internationally in capital markets be worsened by the recent declaration by Moody's that Pakistan faces significant 'external financing risks'? If the target of external financing is not met and reserves begin to fall especially after November when a lumpy repayment of Sukuk bonds of $1 billion has to be made then there could be considerable instability in the foreign exchange market.
Given the above major risks and uncertainties about economic developments in the short to medium run, the recommended approach is to come up with a range of forecasts for the key economic variables, based on an upside and a downside scenario respectively.
The upside scenario would include the following. First, agreement is reached shortly on a trade deal between USA and China and global trade picks up. Pakistan's exports remain unaffected and the growth rate approaches 8 percent as per the IMF projection. Imports continue to decline, especially with the return of the oil price to a lower level. Consequently, the trade deficit falls sharply. Remittances also recover from the recent fall. The reduction in the current account deficit of more than 50 percent is achieved.
Second, there is no military confrontation between India and Pakistan due to timely intervention by the international community. Third, there is some rapprochement between the Government and the opposition and large-scale demonstrations are averted.
Fourth, although FBR revenues continue to fall short of the ambitious target, there is a degree of understanding shown by the IMF and appropriate waivers are granted. Consequently, no mini budget is required.
Fifth, with continuous reduction in the current account deficit there is much less pressure on the rupee and it depreciates only modestly by about 10 percent only by end-June 20 from the level in end-June 2019, more or less, in line with the rate of inflation. The policy rate is also adjusted down gradually.
Sixth, Pakistan is successful in mobilizing the required level of external financing and reserves remain on an upward path. Also, the expected improvement in output of most crops takes place and industrial investment and production stage a recovery.
The impact of the above significant positive developments could lead to a relatively high GDP growth rate of 3.5 percent as opposed to the current projections of significantly less than 3 percent. The inflation rate could remain double-digit initially but could slide back to a single digit rate in the second half of 2019-20. The current account deficit could fall to a level close to $7 billion. However, the fiscal deficit is likely to remain high at close to 7.5 percent of the GDP even in this upside scenario, with the primary deficit at close to 2 percent of the GDP.
The downside scenario could unfortunately imply a major deterioration in economic conditions. There is a worldwide recession and both exports and remittances show little growth. Disturbed conditions in the Middle East and Iran continue to keep the price of oil at a relatively high level.
Second, the situation remains very tense with regard to the situation in Kashmir. Not only does this lead to a jump in military spending but private investment becomes increasingly shy. The SBP continues to pursue a very contractionary monetary policy and the exchange rate falls sharply in the event of a shortfall in external financing.
Third, the domestic political situation remains disturbed. There is also a persistent strike by traders. Along with accountability of the private sector and the bureaucracy, there is a major dislocation of economic activity.
The outcome in such a scenario would be a GDP growth rate of 2 percent or even less if there is widespread crop failure, as appears to be the case already with the cotton output. The inflation rate could continue to rise and average a high 13 percent over the year as per the original IMF projection. The current account deficit will continue to be contained with aggressive exchange rate and higher policy rate moves. Moreover, the budget deficit could remain very high at close to 8.5 percent of the GDP due to a larger shortfall in revenues, higher costs of debt servicing and failure of the Provincial Governments to generate significant cash surpluses. Overall, depending on which scenario emerges, the range of projection of key macroeconomic variables is given below:
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2019-20
2018-19
(Downside) (Upside)
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GDP Growth Rate (%) 3.3 2.0 3.5
Rate of Inflation (%) 7.3 13.0 10.0
Current Account Deficit ($ billion) 13.6 7.5 7.0
Budget Deficit (% of GDP) 8.9 8.5 7.5
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Needless to say, we hope and pray that the negative factors play a less dominating role and a better outcome is achieved on the economic front in 2019-20. The people have borne enough stress already.
(The writer is Professor Emeritus at BNU and former Federal Minister)
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