Pakistan’s weaker growth pulls down regional economy: IMF

KARACHI: Pakistan’s lukewarm economic growth has made the International Monetary (IMF) to further trim regional growth forecast to 3.6 percent this year from an earlier projection of four percent.

“Weaker growth in Pakistan is pulling down the regional aggregate growth rate this year, with large macroeconomic imbalances and ongoing policy adjustment challenges expected to slow Pakistan’s growth from 5.2 percent in 2018 to 2.9 percent in 2019,” the IMF said in a report on Monday.

“Regional growth prospects also continue to be constrained by low private investment and delays in reforms to address persistent structural impediments to private sector development.”

Regional growth for 2019 was projected at four percent in the October 2018 Regional Economic Outlook (REO), compared with the projection of 3.6 percent in the current the Middle East, North Africa, Afghanistan, and Pakistan REO Update. The report is published each spring. An IMF’s team is currently on a visit to Pakistan to wrap up an unprecedentedly long discussion on a bailout package needed to get the economy back on the stabilisation mode. The Washington-based lender has revised down Pakistan’s growth projections for the current fiscal year and in the medium term amid a weaker external environment. Large external imbalance is expected to weigh on the medium-term growth outlook, it said.

The State Bank of Pakistan has too lowered growth forecast for the current fiscal year to 3.5 to four percent and kept pumping interest rates to fight off inflation that reached over 9.4 percent in March, the highest since November 2013. The rupee has lost 35 percent of its value since December 2017.

“Regional inflation is projected to pick up slightly to 11.3 percent in 2019, primarily due to higher inflation in Egypt (fuel subsidy reform) and Pakistan (weaker exchange rate),” the IMF said.

The IMF sees strong growth in remittances as a succor to crumbled current account position temporarily aided by short-term monetary supports from Saudi Arab, China and other countries. “While remittances help to provide a buffer for current account deficits… there is a downside risk of a slowdown in remittance-originating countries, most of which are in Europe or the Gulf Cooperation Council,” the IMF said.

The IMF recommended restructuring of state-owned enterprises to introduce efficient spending as inefficient state-owned enterprises suppress competition and divert resources to less productive areas. “There is also considerable room to improve revenue mobilisation, including by eliminating distortionary exemptions, taxing the richer segments of the population, such as by introducing property and wealth taxes, broadening the tax base and reducing informality,” it said.

The IMF said tensions between India and Pakistan are one of the geopolitical risks that may increase investors’ perception of risk for the whole region, leading to capital outflows and exchange rate pressure.