Macroeconomic stability

The World Bank in its report, ' South Asia Economic Focus Spring 2018' released recently, said that macroeconomic stability in Pakistan is a major concern for the near-term economic outlook, and several short-term measures will be required to correct external and domestic imbalances, which must be complemented with implementation of medium-term reforms. The Bank has pointed out that Pakistan's economic growth continues to accelerate but macroeconomic imbalances are widening. The balance of payments position is particularly vulnerable at the current level of reserves. According to the report. "Upcoming elections may delay decisive policy adjustment, such as increased exchange rate flexibility and fiscal consolidation, until after the elections. In the medium-term, the government needs to put considerable effort in reforming its tax system and tackle competitiveness challenges."

To deal with the multiple challenges, WB has advised that a strategy based on lowering the cost of doing business and improving productivity would be critical for higher and sustainable export growth. The GDP growth is projected to reach 5.8 per cent in 2018.However, after the general elections, expected policy adjustments to correct macroeconomic imbalances are projected to lead to a slowdown in growth in 2019, driven by contraction in domestic consumption and investment. But the upside is that growth is expected to recover in 2020 and reach 5.4pc. But this recovery is contingent upon restoring and preserving macroeconomic stability, as well as steady progress in implementing reforms which tackle key growth constraints.

Focusing on the outlook, the report claims that the GDP growth was projected to reach 5.8pc in 2018, supported by infrastructure projects of the China-Pakistan Economic Corridor (CPEC), improved energy supply and persistent private consumption growth. The outlook assumes that oil prices will increase moderately but remain low and that political and security risks will be managed. The WB says that pressure on the current account is expected to persist as the trade deficit is projected to remain at an elevated level during fiscal year 2019. Increased exchange rate flexibility should support exports and imports are expected to slow down in 2019. Remittances will continue to partly finance the current account deficit; nonetheless, slower growth in Gulf Cooperation Council ( GCC) countries will affect migrants' employment options and growth in remittances. Foreign direct investment (FDI), multilateral, bilateral, and private debt-creating flows are expected to be the main financing sources in the medium-term. To meet external financing needs, the government will continue to access international markets.

Fiscal deficits are projected to narrow in 2019 as authorities adjust macroeconomic policies. The adjustment will come initially on the back of scaling down in investment spending both at the federal and provincial level. However, bolstering of revenues as a result of expanding the tax base and other administrative measures will support fiscal consolidation. The report claims that inflation is expected to rise in 2019 and remain high in 2020. The increase in prices will be driven by exchange rate pass through to domestic prices and a moderate increase in international oil prices.

It is relevant to add here that the government imposed regulatory duties on some imports to slowdown import growth. In addition, the exchange rate depreciated in December 2017 (by 5pc) and in March 2018 (4pc), and the policy interest rate was raised by 25 bps in January to ease demand pressures. Despite this, official international reserves have declined to $ 12.2 billion by end-February (2.3 months of imports), compared to $16.1bn at end-June 2017. To support declining reserves, the government issued international bonds of $2.5bn in November 2017. The overall outlook is mixed but much will depend upon how the managers of the national economy prioritize their options.