KARACHI: Pakistan has experienced the region’s sharpest deterioration in current account deficit as imports fuelled by China-pledged projects and economic imbalances affected the country’s external account, the World Bank said.
The bank said current account deficits have been growing across most of South Asia and buffers are being eroded in some cases.
“The sharpest deterioration was in Pakistan, with the current account deficit worsening from $220 million in the first quarter of 2016 to $5.80 billion in the second quarter of 2018,” it said in the ‘South Asia Economic Focus Fall 2018: Budget Crunch’ report on Sunday. “The growth of imports is partly the result of capital goods imports for the China Pakistan Economic Corridor (CPEC), but it is also the consequence of growing macroeconomic imbalances.”
The World Bank expected external financing needs to further increase over the next few years due to loan repayments and profit repatriation related to projects in the CPEC. External financing needs reached $21.5 billion in FY 2016/17, or 7.1 percent of GDP.
The bank said a weaker macroeconomic situation and a delayed adjustment of the exchange rate led to considerable loss of reserves, bringing coverage down to 1.5 months of imports by end-September.
The monetary tightening is also to take toll on growth, which accelerated to 5.8 percent during the last fiscal year of 2017/18. Growth is projected to slip at 4.8 percent in FY2019. The World Bank asked over 350 regional economists from seven countries about their views on growth prospects in their countries.
“Based on the responses, network members do not anticipate much change in economic growth in their countries,” it said. “The exception is Pakistan, where there is a strong consensus that the growth rate will decline.”
The bank said views on Pakistan’s economic prospects have changed substantially. “While in the last survey respondents still anticipated faster economic growth and larger fiscal deficits, there now is a strong majority expecting fiscal consolidation, lower current account deficits, and slower economic growth.”
The World Bank said the amplification of boom-and-bust cycles may be severe in Pakistan. The country’s recent economic history is one of slow growth punctuated by recurrent macroeconomic adjustments, often supported by International Monetary Fund programs.
“Adjustment programs brought in macroeconomic stability, but often at the cost of a temporary (and often substantial) deceleration in economic activity,” it added.
“And once the economy was back on track, fiscal pressures mounted again, triggering the next boom-and-bust cycle. Fiscal policy has thus amplified macroeconomic fluctuations.” Pakistan has allowed it currency to depreciate substantially, but “despite currency depreciation export performance remains disappointing,” the World Bank said.