ISLAMABAD: BMI, a Fitch Solutions company has predicted that the Pakistan Muslim League-Nawaz-led government will remain in power over the coming 18 months and will succeed in pushing through with the International Monetary Fund (IMF)-mandated fiscal reforms.
“In the unlikely event that the government is replaced, the most likely alternative is a military backed technocratic administration rather than fresh elections,” it added.
In a report, “Pakistan Country Risk Report”, the rating agency noted that despite several successful legal appeals, opposition leader Imran Khan will remain imprisoned for the foreseeable future.
It further stated that the risks to growth outlook are heavily weighted to the downside. Pakistan’s economy remains very fragile in the face of external shocks. Given that 40 percent of Pakistanis work in agriculture, another flood or drought would pose a significant risk to the economy.
The country’s fragile political situation could also derail the recovery. While Pakistan’s establishment parties were successful in creating a new coalition government following the February election, the strong electoral performance of independent candidates backed by jailed opposition leader Imran Khan suggests that there is significant dissatisfaction with the current political elite. Another round of protests in urban areas could disrupt economic activity.
As we had predicted, economic activity in Pakistan was stronger than most analysts had expected in FY2023/24 (July 2023-June 2024).
Economic growth in Pakistan will accelerate from 2.4 percent in FY2023/24 to 3.2 percent in FY2024/25, driven by monetary easing, improved agricultural output and slowing inflation. Risks are heavily weighted to the downside, the report noted.
“We think that Pakistan’s current account deficit will remain small but will widen from 0.8 percent of GDP in FY2023/2024 to 1.0 percent of GDP in FY2024/2025. The slightly wider overall deficit will be due to a larger trade deficit, which will widen from 7.5 percent of GDP in FY2023/2024 to 7.7 percent of GDP in FY2024/25. Risks are weighted towards a wider deficit, which could be caused by a jump in oil prices or lower-than-expected grain production. Pakistani policymakers have had more success than we had expected in stabilising the rupee, and we now think that the big falls in the currency are behind us.”
It further stated that the rupee will only weaken a touch over the remainder of 2024, slipping from PKR 278/USD to PKR 290/USD. Risks remain weighted heavily towards a larger rather than a smaller depreciation. Easing inflation in Pakistan will provide the State Bank of Pakistan (SBP) with the space to cut its key policy rate from 22.00 percent to 16.00 percent in 2024. We expect that policymakers at the SBP will continue to loosen policy over the longer term, to 14.00 percent by end of 2025. The key risk to this forecast is towards faster-than-expected inflation, which would cause policymakers to slow their easing cycle.
“We expect that Pakistani policymakers will miss their ambitious budget targets, but we still expect that the deficit will narrow, slipping from 7.4 percent in FY2023/24 to 6.7 percent of GDP in FY2024/25. Provided that the government remains on the current policy trajectory, the country will probably succeed in negotiating a longer-term deal with the IMF. Risks remain weighted towards a much larger deficit. The economic recovery is fragile and another shock would quickly push up the cost of servicing Pakistan’s large government debt burden,” the report noted.
Copyright Business Recorder, 2024
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