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August 20, 2019

EIU expects Pakistan growth tumbling to 2.5pc in FY2020


August 20, 2019

KARACHI: Pakistan’s growth is expected to further fall at 2.5 percent in the current fiscal year with the government taking monetary and fiscal steps to recuperate fragile economic health, the Economist Intelligence Unit (EIU) said on Monday.

“We continue to expect that the government's efforts to address balance-of-payments pressures will have a dampening effect on economic expansion,” the London-based EIU – the research and analysis arm of the Economist Group – said in a report. “We forecast real GDP to grow by 2.5 percent in 2019/20.”

The EIU expects growth likely to recover at a very gradual pace and to grow annually by 2.8 percent on average in 2020/21-2022/23. “We believe that the combination of a heavier tax burden across the economy and weaker government spending on public services will dampen economic activity.” Pakistan Tehreek-e-Insaf-led government, having completed one year in the office, adopted a bevy of strategies to bring the economy back on track with the growth having lost steam and tumbled to 3.3 percent in the last fiscal year from decade-high 5.5 percent in the preceding fiscal year.

The government’s emergency measures to restrict imports seemed to bear fruits in the last fiscal year as current account deficit that was mainly widened by distended gap in imports and exports narrowed to $13.6 billion in FY2019 from $19.9 billion in FY2018. In terms of percentage of GDP, the current account deficit contracted to 4.8 percent from 6.3 percent.

Export sector, however, has yet to contribute in reducing the external financing gap that is expected in the range of $10 to $11 billion in FY2020. Contraction in imports caused exports to remain stagnant due to shortage of raw materials. Anemic rupee that lost over 50 percent of its value against the US dollar in a series of depreciation that began in November 2017 could not even propel the exports sector to touch the last fiscal year’s mark of $23 billion.

Faced with a challenge to address adverse external account position, the central bank gave up its dovish policy stance in January last year and brought the benchmark interest rate up to 13.25 percent by a cumulative 750 basis points increase since then.

“Tightening of monetary policy, will hamper investment and economic growth,” the EIU added. The EIU expects inflation to swell further from 7.3 percent in the last fiscal year, in consonance with the State Bank of Pakistan’s (SBP) inflation projection of 11 to 12 percent for FY2020. SBP forecast growth at around 3.5 percent in the current fiscal year.

“High inflationary pressure will weigh on the purchasing power of citizens, thereby depressing consumption growth,” the EIU said. “These factors, combined with a tightening of monetary policy, will hamper investment and economic growth.”

The EIU said consumer and producer prices would accelerate in 2019 compared with 2018. The EIU revised its inflation forecasts and expected consumer prices to increase by an average of 9.1 percent in 2019 compared with 8.4 percent previously.

“Meanwhile, we now expect producer prices to increase by an average of 12.1 percent in 2019,” it said. “The major factor driving inflation will continue to be weakness in the exchange rate, which will raise imported inflation.”

The EIU said International Monetary Fund’s (IMF) loan would help Pakistan ease precarious balance-of-payments situation with loans from friendly countries and other multilateral institutions to help stabilise external sector. Pakistan agreed to $6 billion IMF’s loan program last month that was expected to tap on $38 billion in foreign financial assistance over the next three years.

“Under the IMF program, we expect Pakistan to undertake reforms at the State Bank of Pakistan, switching to a more lightly managed exchange-rate regime that is more reflective of market demand for the local currency,” it added. “In view of the wide current-account deficit, this will provide a greater degree of control than would have been the case under a floating exchange-rate system.”

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