Pakistan’s economic growth will be negatively impacted in the short run due to tighter monetary and fiscal policies as a result of the International Monetary Fund’s bailout package, a leading economic research firm has said in its latest report.
Fitch Solutions, the macro research arm of global credit rating agency Fitch Ratings, said they were revising their forecast for Pakistan’s real GDP growth for the outgoing fiscal year from 4.4% to 3.2%, and the upcoming fiscal year 2019-20 to come in at 2.7%, down from 4.0% previously. Fitch noted that this was lower than the forecasts by Bloomberg of 3.3% for the outgoing fiscal year and 3.5% for 2019-20.
“We believe that the bailout package from the IMF will see tighter monetary and fiscal policies in Pakistan, which will be negative for growth in the near term,” said Fitch Solutions in the report. “That said, investment into the China-Pakistan Economic Corridor (CPEC) will continue to provide some support to the economy,” it added.
Fitch pointed out that following the agreement on a $6 billion bailout package to address the country’s balance of payment crisis, the State Bank of Pakistan (SBP) increased the policy rate by 150 basis points, adding that shortly afterwards, the Ministry of Finance of Pakistan also presented a budget with the aim of trimming Pakistan’s primary deficit to 0.6% of GDP in FY19/20, from 1.9% of GDP in FY18/19 as per IMF’s estimates. In this regard, the report said that higher taxes will erode the purchasing power which in turn would slow down consumption growth to 5.3% in FY20, down from 6.3% in FY18. The consumption currently stands at around 82% of the GDP.
“Given our expectations for continued upside pressure on consumer prices over the coming months, we believe that the consumers’ purchasing power will continue to fall over the coming months, thereby weighing on consumption,” the report stated. However, it noted that that some of the effects of price hikes will be partially offset by the ‘government’s populist measures, such as providing electricity subsidies to consumers who use less than 300 units of electricity per month’.
The research firm also gave a bleak forecast on the government’s aims to raise tax revenues, compounded by little improvement in net exports weighed down by a global slowdown and the likelihood of imports further increasing over the coming months. “While Pakistan and the IMF have agreed on focusing on tax-based measures to manage the fiscal deficit, according to media reports, we believe that the Pakistani government will fall short of its ambitious revenue targets and will likely have to cut spending to meet the primary deficit target of 0.6% of GDP,” it added.
The Fitch Solutions also forecasted a government spending (around 12% of GDP) to slow in growth to 6.4% in FY19/20, down from 14.2% in FY17/18, as the country embarks on an austerity drive. Moreover, the report sees little improvement in Pakistan’s net exports, which recorded a deficit of around 11% of GDP in FY17/18. Analysts at Fitch Solutions believe that despite the government’s efforts to increase export competitiveness, such as subsidising electricity and gas to the industrial and export sectors, a global slowdown will likely weigh on exports over the coming months.
“Our view is for global growth to slow from 3.2% in 2018 to 2.9% by 2020, with growth in two of the largest main export destinations, the US and China, slowing to 2.0% and 6.1% respectively by 2020, from 2.9% and 6.6% in 2018. Moreover, we believe that imports could increase over the coming months acting as a slight drag on growth,” it noted.
In addition to this, it has been forecasted that the impact of rising oil prices on imports will be exacerbated by a weakening currency. Following the agreement with the IMF, the Pakistani rupee has been devalued by more than 10% to around Rs157/USD, at the time of writing, from around Rs142/USD before the agreement took place in May.
“We believe that investment, which accounts for approximately 17% of GDP, will slow in growth to 5.1% in FY19/20, from 5.7% in FY17/18, as tighter monetary policy implemented by the SBP will likely weigh on investment,” the report stated.
Moreover, the government has committed to borrowing less from the SBP as part of the IMF deal, which will improve the monetary policy transmission in the country, believed Fitch. In addition, business sentiment will likely remain subdued in Pakistan, leading to slower investment growth. “With a slowdown of manufacturing activity, we expect to see a fall in investment appetite related to LSM industries, such as investment in capital goods,” concluded Fitch Solutions.
