Pakistan's GDP growth rate is projected to bottom out at 2.4 percent in fiscal year 2019-20 and 3 percent in 2020-21 as macroeconomic stabilization efforts weigh on activity, says the World Bank (WB).
The Bank in its latest report "Global Economic Prospects, Slow Growth, Policy Challenges" forecast Pakistan's current year growth rate at 2.4 percent - about 0.3 percent lower than its estimates of June 2019 - before touching 3 percent next fiscal year and 3.9 percent in fiscal year 2022.
The report stated that growth in Pakistan is projected to languish at 3 percent or less through 2020 as macroeconomic stabilization efforts weigh on activity. Activity in Pakistan has decelerated in response to contractionary monetary policy intended to restore domestic and external balances. Policy adjustments to address macroeconomic imbalances in Pakistan also weighed on aggregate growth in this group, maintained the report.
Macroeconomic adjustment in Pakistan, including a continuation of tight monetary policy and fiscal consolidation, is expected to continue. Growth is projected to bottom out at 2.4 percent in fiscal year 2019-20 (July 2019-June 2020). Thereafter, as macroeconomic conditions improve and structural reforms support investment, growth is projected to steadily advance, reaching 3.9 percent by fiscal year 2021-22.
Inflation has been mostly stable in the region on the back of weak domestic demand and broadly stable currency markets, with the notable exception of Pakistan.
Pakistan's budget deficit rose more sharply than expected. Contributing factors were a shortfall in revenue collection, combined with a sizable increase in interest payments, stated the report.
South Asia's growth is estimated to have decelerated to 4.9 percent in 2019, substantially weaker than 7.1 percent in the previous year. The deceleration was pronounced in the two largest economies, India and Pakistan. Weak confidence, liquidity issues in the financial sector (India), and monetary tightening (Pakistan) caused a sharp slowdown in fixed investment and a considerable softening in private consumption. Export and import growth for the region as a whole moderated in line with a continued slowdown in global trade and industrial activity. Business confidence was hampered by subdued consumer demand in India and security challenges in Sri Lanka.
Demand faltered amid credit tightening, reflecting structurally high non-performing assets (e.g. Bangladesh, India and Pakistan), liquidity shortages in the non-bank financial sector in India, and tightening policies in Pakistan.
In Pakistan, growth decelerated to an estimated 3.3 percent in fiscal year 2018-19, reflecting a broad based weakening in domestic demand. Significant depreciation of the Pakistani rupee (the nominal effective exchange rate depreciated about 20 percent over the past year) resulted in inflationary pressures. Monetary policy tightening in response to elevated inflation restricted access to credit. The government retrenched, curtailing public investment, to deal with large twin deficits and low international reserves.
Bangladesh, the third-largest economy in the region, fared better than India and Pakistan, with growth officially estimated at 8.1 percent in fiscal year 2018-19.
The weak global trade outlook will continue to weigh on regional export growth in the near term. Regional economic activity is expected to benefit from policy accommodation (India and Sri Lanka), improvement in business confidence and support from infrastructure investments (Afghanistan, Bangladesh and Pakistan).
Although recent tensions between India and Pakistan have abated, a re-escalation would damage confidence and weigh on investment in the region.
The report stated that for countries with elevated debt levels and large current account deficits (Pakistan and Sri Lanka), an unexpected tightening in global financing conditions could sharply raise borrowing costs and lead to stops in capital inflows.
In the post-crisis period, a slight moderation in India's productivity growth, and larger declines in the smaller economies of Afghanistan, Bhutan and Sri Lanka, was partially offset by pickups in Bangladesh and Pakistan.
In Pakistan, annual productivity growth picked up from a pre-crisis average of 2.4 percent to 3.1 percent during 2013-18, slightly below the emerging market and developing economies (EMDEs) average of 3.4 percent. During the post-crisis period, productivity growth benefited from strong foreign direct investment (FDI) inflows and infrastructure projects which supported private sector activity. In Pakistan, productivity growth was limited by macroeconomic instability.
Productivity levels in the three largest economies of South Asia Region (SAR) - India, Bangladesh and Pakistan - are lower, ranging between 14 and 27 percent of the EMDE average, reflecting their relatively large informal sectors, low urbanization rates, and weak financial development.
Many firms cite infrastructure gaps as important obstacles to their business activities. Firms that cited infrastructure obstacles were found to be less productive in Pakistan and Bangladesh. The environment has also been less supportive in terms of access to finance with state-owned banks dominating banking system assets (e.g. roughly 70 percent in India) and their balance sheets encumbered by elevated nonperforming loan ratios (usually around 10 percent).
Moreover, firms facing infrastructure obstacles have been found to be less productive than others in Pakistan and Bangladesh. Improved infrastructure in the energy and transportation sectors, as well as technology-oriented capital accumulation, can promote productivity growth and boost international competitiveness.
Economic and financial crises have proven to hold back productivity in the region, as observed after the global financial crisis and in economic downturns in India and Pakistan in the 1990s. Political instability seems to be a more severe obstacle to the operations of South Asian firms than in other EMDE regions.
Strengthening economic policy institutions, improving monetary and fiscal policy frameworks, and enhancing financial regulation and supervision can help to provide a stable macroeconomic framework for firms, reduce uncertainty, and boost productivity, maintained the report.
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