The Asian Development Bank (ADB), in its latest report, has projected the economic growth rate of Pakistan at 2.8%; which is the lowest in South Asia. Whereas the inflation rate would be 12%; which is highest in the block of eight nations.
Pakistan’s Gross Domestic Product (GDP) growth slowed as economic policies to address the twin deficits took effect. In fiscal year 2018-19, the growth slowed to 3.3 percent; i.e. a 2.2 percentage points decline compared to the previous year, due to the stabilization measures undertaken by the government. Over the past year, the exchange rate was allowed to depreciate, with a cumulative depreciation of 25.5 percent, the development budget was cut, and energy prices were increased.
The Current Account Deficit (CAD) declined. The CAD narrowed to US$13.5 billion (4.8 percent of GDP) in FY19 compared to US$19.9 billion (6.3 percent of GDP) in FY18. The decline was primarily driven by lower import growth (goods imports declined by 7.4 percent while services imports fell by 14.9 percent). Exports, on the other hand, did not respond to the exchange rate depreciation, as regaining competitiveness after an extended period of an overvalued exchange rate will take time. The growth in remittances by 9.7 percent year-on-year in FY19, due to higher flows from USA, Malaysia, and GCC countries, also supported the current account. The narrowing of the CAD has continued in FY20, as the CAD declined to US$1.3 billion in Jul-Aug FY20, compared to US$2.9 billion in Jul-Aug FY19. Imports declined by 23.4 percent year-on-year in Jul-Aug FY20, while exports recorded a marginal recovery of 1.4 percent year-on-year.
As per ADB Report, Pakistan’s economy in fiscal year 2019, which ended on 30 June, is showing signs of recovery as the government’s fiscal consolidation and austerity measures to address the structural weaknesses started to take effect. There are signs of recovery in the current account deficit, foreign exchange reserves and the IMF deal will also improve economic prospects. However, the ADB’s report showed deterioration in real economic growth rate and inflation, besides pointing out challenges posed by the high fiscal deficit and growing public debt.
Given the need for the authorities to address sizable fiscal and external imbalances, the economy is expected to slow further, with GDP growth projected at 2.8% in the fiscal year 2019-20. Earlier, the ADB had projected a 3.6% growth rate for the current fiscal year.
This ADB Update raises the 2019-20 inflation projection for Pakistan, markedly higher at 12.0% in anticipation of planned tariff hikes for domestic utilities, higher taxes, and especially the lagged impact of currency depreciation. The 12% projections were far higher than the April 2019 forecast of 7% inflation for this fiscal year by the ADB.
At 2.8% growth rate, Pakistan’s economy will be the slowest growing economy in a bloc of eight South Asian nations. Like the last fiscal year, Bangladesh’s economy will be fastest-growing at a rate of 8%, followed by India that is projected to grow at 7.2% rate and Maldives and Nepal at 6.3%. Even war-torn Afghanistan is projected to grow at a 3.5% rate in this fiscal year. Overall, South Asia’s growth momentum has softened and growth forecasts are lowered to 6.2% for 2019 and 6.7% for 2020.
The economic reform programme, which is supported by the IMF, envisages a multiyear strategy for revenue mobilization to pare public debt to a sustainable level, according to the lender. The budget deficit in this fiscal year is expected to equal 7.2% of GDP—still large but 1.7 percentage point lower than the last fiscal year. The financing of the deficit is expected to come mostly from external and non-bank sources.
Resource allocation indicates a shift toward external borrowing, with net external financing estimated at Rs1.8 trillion, or 4.2% of GDP. Financing from nonbank sources is projected at Rs833 billion, or 1.9% of the GDP.With the further narrowing of the trade deficit and a continued positive trend in workers’ remittances, the current account deficit is projected to narrow further to 2.8% of GDP in FY2020 -0.2% lower than the earlier ADB projections but higher than the government estimates. The import payments will remain subdued, reflecting weak economic activity and the pass-through of past rupee depreciation against the US dollar. The real effective exchange rate is now thought to be near equilibrium, and a lower and more stable rupee is expected to improve export competitiveness, said the ADB. Let’s hope that the foreign direct investment should revive as investors’ confidence is restored with the implementation of the IMF stabilization and reform program. This should also help bring additional finance from multilateral institutions and other international partners. Along with the activation of a Saudi oil facility with potential disbursements of $1 billion in the current fiscal year, these developments are expected to raise foreign exchange reserves to reach more than $10 billion by the end of FY2020.
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Pakistan is expected to attract foreign investment worth over $2 billion in sovereign debt instruments in the current fiscal year as stability in the rupee-dollar parity and eight-year high benchmark interest rate have started attracting inflows after a 25-month hiatus.
The country received a net foreign investment of $328 million in debt instruments, mostly in three-month treasury bills, in the first three months (July-September) of the current fiscal year 2019-20, BMA Research said while quoting central bank’s data in a report.
Last time, it was in May 2017 when foreign investors bought debt instruments in Pakistan. Since then, they invested nothing till June 30, 2019, according to the State Bank of Pakistan (SBP).
Foreigners did not invest in the instruments for two years from June 2017 to June 2019 because of high volatility and instability in the rupee-dollar parity, which strongly discouraged them.
The Pakistan government let the rupee depreciate 52% from December 2017 to Rs160.05 against the US dollar on June 30, 2019. The rupee has remained largely stable since July 1. Improvement in foreign currency reserves allowed the rupee to recover 2.43% to Rs156.36 on Monday (October 1) compared to Rs160.05 on June 30.
The high volatility and instability in the rupee-dollar exchange rate was the main concern of foreign investors. And the end of volatility and return of stability since July 1 has encouraged foreigners to invest in treasury bills, which are offering a high rate of return of around 13-14% per annum. The high benchmark interest rate, which stands at an eight-year high at 13.25%, encouraged foreigners to make an investment in the debt instrument as the interest rate stood low in the home countries of investors from the developed world.
Pakistan has attracted investment from two leading developed countries – the US and UK. Most of the fund managers dealing with global investors are based in these two countries. The improvement in Pakistan’s foreign currency reserves also assured investors that they would be able to pull out their investment whenever they wanted. Foreigners are believed to continue investing in these instruments until the interest rate remains high. The new investment flow is expected to further support the country’s foreign currency reserves.
Pakistan had formally entered a 39-month IMF loan program in July when the institution released the first tranche of $991.4 million out of the total loan of $6 billion. The IMF program is another reason why foreign investors have returned to Pakistan. Foreigners feel comfortable in investing in the countries running under IMF programs.
On the other hand, State Bank of Pakistan is keeping the interest rate high in order to encourage foreign investors to prolong their investment in Pakistan. There was is a dire need to increase exports to achieve sustainable economic development.
[box type=”note” align=”” class=”” width=””]The author, Khurram Adeel Shaikh, is a PhD Scholar and a freelance writer. Currently he is associated with Bahria University, Karachi Campus, as Assistant Professor and could be reached at khurramadeel.bukc@bahria.edu.pk[/box]