ISLAMABAD: The World Bank has said that Pakistan's economy is slowing down when faced with another macroeconomic crisis due to high twin deficits and low foreign exchange reserves.
In the latest edition of its report entitled “Focus on South Asia: make (de) centralization work”, published on Sunday, the Bank said that with a stabilization program backed by IMF funds, the country's economic growth was expected . Stay low in the short term.
Meanwhile, medium-term growth prospects depended on the country's ability to implement the structural reforms necessary to boost competitiveness and achieve sustained growth, according to the report.
Progress in poverty reduction was expected to be limited during the macroeconomic adjustment period, he added.
According to the report, measures to restore macroeconomic stability in Pakistan weigh heavily on growth, which is expected to have fallen to 3.3 percent.
Economic policies in recent years have resulted in an increase in debt levels and an erosion of fiscal and external buffers, affecting the ability of the economy to absorb shocks. The country needs to restore these buffers, especially because turbulence in global financial markets could affect the country's access to private external financing. And the weakening of the world economy and rising trade tensions could reduce external demand.
Growth is expected to remain low in the short term
"The increase in pressures on the dampers of asset quality and capital adequacy due to the economic slowdown and the inflationary environment could slow the forecasted growth rebound, especially when the strong mobilization of short-term deposits due to Recent increases in policy rates continue to be intermediated primarily towards government securities, "the report said.
The main internal risk arises from possible difficulties in implementing the necessary adjustments and structural reforms. The ability of vulnerable households to resist the economic impact of the crisis will depend on the inclusion of growth, food and non-food inflation, and the resistance of the sectors relevant to their employment: agriculture, construction and wholesale and retail trade.
On the outlook, the report said that growth is projected to slow down to 2.4 percent in fiscal year 2020, with continued fiscal consolidation and a tight monetary policy stance. The IMF adjustment program involved a rebalancing of internal to external demand.
The report said that growth was expected to recover slowly, at 3pc in fiscal year 2021, as macroeconomic conditions improved and external demand picked up following structural reforms and increased competitiveness. This recovery is conditioned by relatively stable global markets, a decrease in international oil prices and lower political and security risks, according to the report.
Inflation is expected to increase in fiscal year 2020 to 13pc, but then it will begin to decrease. The price increase will be driven by the impact of the second round of the transfer of the exchange rate to domestic prices.
The report said that the country's commercial banks would remain well capitalized. However, the growing demand for public sector credit, mainly federal government loans, and rising interest rates were expected to shift private credit in the short term.
The current account deficit was expected to decrease to 2.6pc of GDP in fiscal year 2020 and more to 2.2pc in fiscal year 2021, as greater exchange flexibility would support a modest recovery of exports and rationalization of imports .
The consolidated fiscal deficit, including donations, was projected to reach 7.5 percent of GDP in fiscal year 2020 and would remain high at 6.2 percent in fiscal year 2021. The public debt / debt ratio was expected. GDP remained high in fiscal year 2021 at 80.8 percent, increasing exposure to debt-related shocks, the World Bank report said.
Fiscal consolidation throughout the federation would be necessary for the public debt to decrease, but the debt / GDP ratio was not expected to fall below 70{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} of GDP, the debt burden reference for emerging high-risk markets , in the medium term. Pakistan's debt vulnerabilities would remain high due to large debt repayments in foreign currency and considerable refinancing of domestic short-term debt.
According to the report, progress in poverty reduction, which has not been interrupted since 2001, is expected to stop during the macroeconomic adjustment period due to growth slowdown and higher inflation rates. The poverty count, measured using the international poverty line of $ 1.9 per person per day, is expected to remain at the level of fiscal year 2019 (3.1pc). Poverty measured with the $ 3.2 line is expected to decrease from 31.4pc last year to 31.2pc in fiscal year 2020, while poverty measured with the $ 5.5 poverty line is projected at 72.5pc in fiscal year. 2020, compared to 72.6pc in fiscal year 2019.
Exports grew faster than imports in the first two quarters of 2019, suggesting weak domestic demand. Therefore, the weakening of world conditions does not seem to be affecting South Asia through the commercial channel.
In addition to Pakistan, South Asian exports continued to grow rapidly in the first quarter of this year, but export growth moderated strongly in India in the second quarter. Import growth, on the other hand, has declined severely in all South Asian countries, and imports even contracted between 15{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} and 20{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} year-on-year in Pakistan and Sri Lanka, according to the report.
Across South Asia, food prices have increased in recent months. Food prices in 2018 remained stable in Pakistan, Afghanistan and Nepal, but fell in India, Maldives and Sri Lanka. However, food prices have recently increased in all countries, except Sri Lanka.
In Pakistan, Afghanistan, Nepal and Bangladesh, food prices are more than 6{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} higher than a year ago.
Suggesting that it is losing brightness, the report says that economic activity is moderating in many countries in South Asia in line with global developments. Most countries in South Asia are expected to grow below long-term averages this year.
Posted on Dawn, October 14, 2019
Source: https://www.dawn.com/news/1510722/economy-stagnating-amid-big-deficit-low-reserves-wb