KARACHI: World Bank has projected lower GDP growth for Pakistan during two fiscal years i.e. 2018/2019 and 2019/2020 to 3.4 percent and 2.7 percent, respectively.
The World Bank in a report released on Sunday, said that growth for Pakistan is projected to decelerate to 3.4 percent in FY19 and to 2.7 percent in FY20, as the government tightens fiscal and monetary policies.
“While domestic demand growth will slow down immediately, net ex¬ports will only increase gradually,” it added.
The World Bank said that as macroeconomic conditions improve, and a package of structural reforms in fiscal management and competitiveness is implemented, growth is expected to recover to 4.0 percent in 2020/2021.
“This baseline scenario assumes stable international oil prices and reduced political and security risks,” it added.
Inflation is expected to rise to 7.1 percent (average) in FY19 and projected to reach 13.5 percent in FY20 as a result of further exchange rate depreciation pass-through.
The trade deficit is projected to remain elevated during 2018/2019, but to narrow in 2019/2020 and 2020/2021 as the impacts of currency depreciation, domestic demand compression, and other regulatory measures to curb imports set in. Remittances are projected to finance over 70 percent of the trade deficit.
FDI, multilateral and bilateral debt-creating flows as well as financing from international markets are expected to be the main financing sources of the current account in the near to medium term.
The fiscal deficit is projected to increase to 6.9 percent in 2018/2019 and to remain high during next two fiscal years, a result of large interest payments and a slow increase in domestic revenues.
Public debt to GDP is expected to cross 80 percent in 2018/2019 and to remain elevated in the next two years, increasing Pakistan’s exposure to debt-related shocks.
The pace of poverty reduction is expected to continue to slow-down in FY2019 and FY2020, following the projected growth deceleration and higher inflation rates.
Together with the macroeconomic adjustment expected over the next two years, there is an urgent need to implement structural reforms to support the growth rebound from FY21 onwards.
The low reserves position and high debt-ratios limit the buffers that Pakistan could use to absorb external shocks (such as an increase in US interest rates) and may negatively impact the government’s ability to access international markets.
Reforms to put the country on a stable growth path include increased exchange rate flexibility, improved competitiveness and lower cost of doing business.
On the revenue front, reforms to improve tax administration, widen the tax base and facilitate tax compliance are critical.
Higher inflation rates may jeopardize recent gains in poverty reduction, since poor households in urban areas are particularly affected by increases in prices, as shown by the most recent inflation hike during the 2007-08 food price crisis.