Macroe­co­nomic sta­bil­ity

The Pak Banker - - FRONT PAGE -

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.

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