The period of stabilisation will continue to marginalise growth and keep inflationary pressure mounting in months and year ahead so the multilateral creditors are projecting lower gross domestic product (GDP) growth and rising inflation continuously touching double digit over the medium term.
All the multilateral creditors especially the International (IMF), World Bank and Asian Development Bank (ADB) unanimously projected GDP growth lower than 3 percent and even the IMF kept it unchanged at 2.4 percent despite the fact that Ministry of Finance high-ups pressed it hard during the recently concluded visit of IMF team that the agriculture sector would rebound, jacking up the growth of this neglected sector in the range of 3.5 percent in the current fiscal year against a negative growth achieved in the last five years. So the higher growth of neglected agriculture sector will push up overall growth of 3.4 to 3.5 percent for the current fiscal year. However, the IMF team refused to buy this argument and decided to keep macroeconomic projections unchanged till the upcoming review of the IMF review mission scheduled to take place by end of the October 2019.
On the other hand, the ADB in its latest Asian Development Outlook (ADO) argued that growth in Pakistan decelerated steeply in the fiscal year 2019 and stood at 3.3 percent, reflecting lower investment amid policy uncertainty and persistent macroeconomic imbalances. The worrisome finding of the ADB is the GDP growth will remain at its lowest ebb at 2.8 percent for 2020, the lowest in the South Asian region. Pakistan’s projected growth will be lower than even Afghanistan.
The sizable currency depreciation accelerated inflation but helped narrow the current account deficit substantially. The GDP growth slowed down from 5.5 percent in FY2018 to 3.3 percent in FY2019, below even the projected number of 3.9 percent of ADB.
Public consumption, edging up to the equivalent of 12 percent of the GDP, contributed 1 percentage point. Meanwhile, contraction in gross fixed investment trimmed growth by 1.3 percentage points, mostly reflecting significantly reduced public investment as the government cut development spending and delaying the finishing of the near-completion energy and transport projects, including those initiated under the China–Pakistan Economic Corridor (CPEC). Private investment also fell markedly as progress stalled on structural reforms, undermining business confidence. The rupee depreciated against the US dollar by 24 percent in FY2019 as the authorities moved toward introduction of a flexible exchange rate determined by the market, after having defended an overvalued rupee in recent years.
To keep the policy rate positive in real terms, State Bank of Pakistan (SBP) raised it by a cumulative 575 basis points to 12.25 percent at the end of FY2019, and by another 100 basis points to 13.25 percent in July 2019. Market rates gradually rose in line with the policy rate.
The deficit in the general government budget, which consolidates federal and provincial accounts, markedly surpassed a large deficit equal to 6.5 percent of the GDP in FY2018 to reach 8.9 percent in FY2019. Revenue declined significantly from the equivalent of 15.1 percent of the GDP to 12.7 percent. Nontax revenue was halved from 2.2 percent of the GDP to 1.1 percent, mainly reflecting reduced central bank profits and a sharp drop from miscellaneous sources, while tax revenue fell from 13 percent of the GDP to 11.6 percent as income and sales tax revenues declined. Expenditure increased by 11.5 percent over FY2018 to reach the equivalent of 21.6 percent of the GDP in FY2019 despite a 33 percent decline in development spending and net lending, which was cut from 4.7 percent of the GDP last year to only 3.2 percent to contain the budget deficit.
For the current fiscal year, the ADB in its latest outlook cited that given the need for Pakistani authorities to address sizable fiscal and external imbalances, the economy is expected to slow further, with the GDP growth projected at 2.8 percent in FY2020.
Fiscal adjustments are expected to suppress domestic demand and demand contraction will keep manufacturing growth subdued. However, agriculture is expected to recover from weather-induced contraction this year, with major incentives in the government’s agriculture support package included in the budget for FY2020.
Inflation remained elevated at the start of FY2020 at 9.4 percent in July and August. It is projected to accelerate further to average 12 percent in FY2020 because of a planned hike in domestic utility prices, taxes introduced in the FY2020 budget, and the lagged impact of currency depreciation. Pressure from inflationary expectations can be relieved by the government’s commitment to refrain from directly financing the budget deficit by borrowing from the central bank as monetary policy continues to tighten. The economic reform programme supported by the IMF envisages a multiyear strategy for revenue mobilisation to pare public debt to a sustainable level. The budget assumes tax revenue increased to 14.3 percent of the GDP. With nontax revenue projected at 2.3 percent of GDP in FY2020, total revenue is expected to increase to 16.6 percent of the GDP. Expenditure in FY2020 is projected to be 23.8 percent of the GDP with an increase of 1.8 percentage points in current spending to cover larger interest payments.
Amid this economic twilight, the PTI led government will have to mainly focus on the fiscal front of the economy because massive slippages might result into creating difficulties in fulfilling the IMF conditions.
In some recent interactions with the IMF high-ups, it could be easily assessed that the fund would be interested to witness seriousness on part of the policymakers to undertake structural reforms and if they found the government delivering on its commitments on reforms then they would help Pakistan get its economy out from the rough patch. The government should make no mistake that in case of any window dressing, lip service, tokenism, etc the IMF programme will prematurely run aground. Only a tremendous political will keep the IMF deal afloat, while a tepid one runs the risk of sinking it right after the first review, so the captain will have to make sure his steerers are not sleeping on the helm and there’s no mutiny on board the ship of economy.
The writter is a staff member