Oxford Economics lowers Pakistan’s GDP growth to 2.4pc in current fiscal

ISLAMABAD: Contrary to the claims of Prime Minister Imran Khan that 2020 will be the year of growth, Oxford Economics, the leader in forecasting and quantitative analyses has lowered the GDP growth of Pakistan to 2.4 percent in the ongoing fiscal 2019-20 from its early forecast of 2.7 percent.

However, in 2020-21, the GDP is now seen to grow to 3.4 percent and will be at 3.6 percent in 2021-22. This means that in the program loan of IMF, the growth will touch the figure of 3.6 percent at the maximum.

The average inflation will stand at 9.4 percent in ongoing fiscal which will drastically lower to 4.4 percent in next fiscal 2020-21 and will slightly surge to 5 percent in 2021-22. Oxford Economics in its report ‘Country Economic Forecast Pakistan’ written by Thatchinamoorthy Krshnan Economist issued on February 19, 2020, while mentioning about the exports, it has predicted the exports at $25.8 billion in current financial year 2019-20 and at $27.8 billion in 2020-21 and at $31 in 2021-22 and at the same time it pinpointed that the downside risks to the exports outlook, due to rises in domestic power tariffs and a moderation in external demand, have risen.

But despite slowing economic activity, it says, higher food prices have resulted in inflation reaching 14.6% in January, which will weigh on private consumption and delay monetary loosening. And public consumption and investment will slow as the government cuts expenditure further to meet IMF targets. High interest rates, lower domestic demand and weak business sentiment will weigh on private investment growth. But net exports should exert a smaller drag on growth as export growth outpaces import growth.

The forecast report mentions that headline inflation jumped to an eight-year high of 14.6% in January from 12.6% in December while core inflation was unchanged at 8.2%. The spike in inflation was primarily due to a sharp increase in food inflation to 23.7% y/y as supply-side disruptions and inadequate buffer stocks caused wheat flour and fresh vegetable prices to soar. The government’s decision to import 300,000 tonnes of wheat last month should help to ease price pressures but the expected implementation of delayed power price hikes poses an upside risk to the inflation outlook. Monetary loosening by SBP is likely to be delayed until inflation starts to ease.

The agricultural sector in FY20 is expected to recover from growth of just 0.8% in FY19 as access to credit improves. But lack of availability of water, higher cost of inputs and adverse weather conditions will remain key downside risks to the recovery.

The industrial outlook is weak as businesses face higher borrowing costs, removal of tax incentives, lower demand, increased input costs due to a weaker Pak Rupee and higher power tariffs.

Despite the modest recovery expected in the agricultural sector, lower industrial production and import growth are likely to weigh on services growth and overall economic activity in FY20.

To meet the IMF target of cutting, it says, the primary fiscal deficit to 0.6% of GDP in FY20, the government has phased out tax exemptions given by the previous government, raised the maximum income tax rate from 15% to 35%, lowered the threshold for minimum taxable income and introduced new customs duties and federal excise taxes. Electricity and gas prices are also being raised sharply to rein in circular debt. But despite strong growth in H1 FY20, revenue collection is below the ambitious target despite help from one-off boosts to non-tax revenues, which could mean additional revenue-raising measures or further cuts to expenditure being introduced in the coming months. The fiscal consolidation efforts are expected to continue into FY21, keeping public spending less supportive of growth.

Private investment growth will remain weak. The weaker Rupee, which lost over 30% of its value in FY19, has raised the cost of inputs and squeezed firms’ profit margins. Operating costs for businesses are expected to rise further in FY20 as the zero-rate sales tax on utilities, inputs and products of five key export-oriented sectors are withdrawn. Despite the challenging external environment, external demand should remain supportive for export-oriented industries and growth because of the weaker Rupee. Despite signs that business sentiment has found a floor, according to the business confidence index and PMI figures, continued high interest rates

It says that fiscal consolidation will continue. The revenue collection is expected to come in below the ambitious targets as a result of slowing economic conditions and lower import growth. Possible revenue shortfalls may result in lower development spending – a downside risk to public investment and growth in FY20.

Monetary policy will continue to remain tight. The supply side constraints in several agricultural products and increases in administered prices should keep inflationary pressures high despite slowing economic activity. To control inflation, the SBP raised its policy rate by 100bp in July (to 13.25%), on top of the cumulative 475bp increase in FY19, and is expected to maintain a tightening bias before partially reversing the hikes later this year as inflation starts to moderate in H2 2020.

Long-term growth prospects muted Pakistan’s economic prospects are constrained by its persistent infrastructure deficit, fiscal mismanagement and political uncertainty. Major reforms are needed to improve long-term growth potential.

The revenue collection has been historically low and, despite fiscal consolidation efforts by the PTI government, the budget deficit rose to 8.9% of GDP in FY19. The government has introduced new revenue raising measures in the FY20 budget as it attempts to meet ambitious IMF targets.

While the measures target indirect taxes, which are more effective in raising revenue quickly, additional steps to expand the tax base further are needed to raise more resources for development and reduce the reliance on debt as a source of funding.

The projects under the US$62bn CPEC programme will lead to a much-needed rise in investment and improve transportation and power generation infrastructure. After initial projects (mostly in power generation), progress has slowed recently as the government is constrained by its limited fiscal space. But the government has signalled its commitment to the programme by setting up a dedicated CPEC authority in October 2019 to improve the momentum of project completion in the next phase.