World Bank clips growth forecast to 4.8pc for FY2019

KARACHI: The World Bank Group has revised down growth forecast for Pakistan to 4.8 percent for the current fiscal year of 2018/19 as it said macroeconomic stabilisation is to take toll on the economy.

“Rising macroeconomic imbalances have dampened the growth outlook,” the World Bank said in its biannual report on Sunday. “Immediate policy adjustments, entailing fiscal consolidation and increased exchange rate flexibility, are needed to restore and maintain macroeconomic stability. Renewed efforts are essential to advance medium-term structural reforms to shift the growth model away from being consumption-led to one led by investment and productivity.”

The country’s economic performance remains robust, with GDP growth in the last fiscal year at 5.8 percent—its highest level in 11 years. The World Bank said the growth is expected to recover in FY2020 and “reach 5.2 percent as macroeconomic conditions improve”.

“This recovery is conditional upon the restoration of macroeconomic stability and a supportive external environment, including relatively stable international oil prices and a strong recovery in exports,” the bank said in the report titled ‘Pakistan Development Update: At a crossroad’.

The World Bank said the contraction in domestic demand due to the tighter fiscal policy is expected to decelerate growth in the services sector, which was the key growth driver in FY2018.

“As a result, the services sector is projected to expand by 5.1 percent in FY19 compared with 6.4 percent in FY18. Agriculture sector growth is projected to normalise at 3.5 percent after a growth rate of 3.8 percent in FY18,” it added. “The industry sector is projected to grow at 5.0 percent in FY19 compared with 5.8 percent in FY18. However, continued growth in services and industry is expected to support a recovery in overall growth to 5.2 percent in FY20.”

The World Bank said the current account deficit is expected to decline moderately, while remaining at elevated levels, given that the trade deficit is projected to also remain elevated during FY2019 and FY2020.

The current account deficit stood at $2.7 billion (or 0.9 percent of GDP) during the first two months of FY2019 compared with $2.9 billion (or 0.8 percent of GDP) in the same period in FY2018.

“Increased exchange-rate flexibility should support an increase in exports and a deceleration in imports in FY20,” it added. “Remittances will continue to partly finance the CAD. Nonetheless, slower growth in GCC (Gulf Cooperation Council) countries will affect migrants’ employment opportunities and growth in remittances.”

The World Bank said the government will need to continue accessing international capital markets to meet external financing needs. “FDI (foreign direct investment), multilateral, bilateral, and private debt-creating flows are expected to be the main financing sources in the medium term.” The World Bank said consolidated fiscal deficit is projected to narrow in FY2019 due to post-election adjustments and fiscal tightening.

“Public investment spending at the federal and provincial levels is expected to be scaled down and an increase in revenue collection is projected through tax-base expansion and other administrative measures,” it added. “Fiscal consolidation is, in turn, expected to improve debt dynamics, but the public debt-to-GDP ratio is expected to remain at around 70 percent of GDP until FY20—the debt burden benchmark for emerging markets.” The bank said inflation is expected to rise in FY2019 and remain high in FY2020.

“The increase in prices will be driven by exchange-rate pass-through to domestic prices and a moderate increase in international oil prices.” Inflation increased by 5.6 percent compared during the first quarter of FY2019 with a 3.4 percent in the same period in FY2018.