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August 20, 2019

Global economic slowdown feared to hurt Pak exports, remittances

Top Story

August 20, 2019

KARACHI: Troubled Pakistan’s economy is feared to face a shockwave as most global economic data harbouring an undercurrent recession shows it could hurt the country’s export sector and impede remittance inflows, analysts and economists said. But, some of them also find rescuer to feeble external account position in downward trend in oil prices.

Former Finance Minister Hafeez Pasha said Pakistan’s exports would be going further down because of global economic downturn. “Remittances from workers abroad are likely to slow down,” Pasha said. “This will lead to a further reduction in the FDI (foreign direct investment) flows as well.”

Mohammed Sohail, chief executive officer at Topline Securities agreed with the viewpoints. “Growth in exports along with dollar remittances would be affected,” he said. “However, if oil prices fall sharply, it will be a blessing.”

Global oil prices tumbled more than 22 percent since April. And, alone in August they fell 20 percent compared to the corresponding month a year earlier, despite severe US sanctions on oil exports from Iran and Venezuela. Prices of non-oil commodity prices have also been declining or remained flat since the middle of last year, as consumption has been curtailed.

The global economy is in the midst of the deepest slowdown since 2015 and in many cases since 2009, according to Reuters. However, it is believed that the US economy is still strong and if headwinds created by the trade war between the US and China can be avoided, the global economy can extend its expansionary phase for quite sometimes.

Economist Ashfaque Hasan Khan said the world is heading towards another great recession like of 2007/08. He believed that lower oil prices could curb the country’s import bill, but they would “drive a further deterioration in the current account gap in times ahead”.

“If the oil prices in the OPEC (the Organization of the Petroleum Exporting Countries) continue to decline, they will drive down real economic activity and soften demand for expatriate manpower, which will ultimately put negative impacts on remittance receiving countries like Pakistan,” Khan, a member of the state-run Economic Advisory Council said. “Exports are likely to suffer due to slowdown in global trade and external demand. The prolonged weakness in exports will not be in favour of the external current account.”

Falling exports is one of the biggest issue faced by the country’s economy. Exports posted a dismal performance during the last fiscal year as they fell one percent to $22.97 billion in FY2019. Remittances, however, rose 9.68 percent to $21.841 billion in the last fiscal year.

The current account deficit fell 32 percent to $13.587 billion in FY2019 compared with $19.897 billion in preceding fiscal year. The government is projecting the current account deficit to reduce further in FY2020, on the back of an expected better export performance, containment of import payments and continued momentum in workers’ remittances. “However, downside risks persist in the wake of a slowdown in global economy, attributed to escalated trade war between US-China and uncertainty in Europe,” the central bank said in a report.

Growth fell to 3.3 percent in the last fiscal year from 5.5 percent a year earlier. “Economic pickup will be gradual and painful, especially after unpopular reforms taken by this government,” analyst Yaqoob Abubakar from Tresmark, an application that tracks financial markets said. “Geopolitical tension between India and Pakistan, agricultural loss due to heavy rains and lack of financial aid may further slow down recovery.”

Bilal Khan, a senior economist at Standard Chartered Bank said softer global growth outlook poses additional risks to Pakistan as the country looks to rebalance its external sector, particularly efforts to increase exports. “We expect growth in Pakistan to slow to 2 percent in FY2020 on the back of tighter fiscal and monetary policies and structural reforms.”

Hasan Khan underscored a need of economic stimulus to calm fears of global recession. “I think there is no need for any further tight monetary policy,” he added. “The central bank must consider downward revision in the interest rates to protect the economy from suffocation.”

Khan of Standard Chartered, however, expects the SBP to maintain the policy rate at 13.25 percent through the current fiscal year – even as global central banks adopt more accommodative stance. “Given the IMF (International Monetary Fund) program’s focus on macroeconomic stabilisation, we believe fiscal and monetary space to boost growth may remain limited in the near-term,” he added. Pakistan agreed to a $6 billion IMF’s loan last month.

Muhammad Yaqub, the central bank’s former governor said Pakistan has an insignificant share in world export trade and with appropriate exchange rate and fiscal policies its exports growth can be maintained.

“Pakistan's economic problems are of its own creation and their resolution basically depends on domestic structural economic reforms rather than what happens to the global economy,” Yaqub said. “Even if it is assumed that global economic recession is likely to develop in the foreseeable future, its impact on Pakistan economy is likely to be minimum and its performances will basically continue to be driven by its policies to reduce the budget and balance of payments deficits.”

Yaqub said the flow of direct foreign investment is determined by the investment environment, security and economic policies rather than by developments abroad. “There is importance for being unimportant in the global setting for Pakistan and it needs to focus on security, certainty and consistency of its own policy framework.”

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