KARACHI: Pakistan’s growth is expected to scale further down to near four percent in the next fiscal year as rise in oil prices and economic imbalances continue to exert pressure on the real GDP, but expected IMF-powered reforms would bring the economy back on track and revive investor confidence, a research arm of Fitch Ratings said.
“For FY2019/20, we forecast a continued slowdown to real GDP growth of 4.1 percent as rising oil prices (Brent to average USD73/bbl in 2019 and USD80/bbl in 2020) and imbalances in the economy will take some time to unwind and continue to exert downside pressure on the economy,” Fitch Solutions said in a latest report.
“However, we acknowledge growing upside risks to our forecasts. The signing of a deal with the IMF could see a faster implementation of much-needed reforms to the economy, improved macroeconomic stability and a boost to confidence. In turn, these dynamics would help to spur greater investment, particularly from Saudi Arabia and China, as well as other countries.”
Fitch Solutions maintained its growth forecast at 4.4 percent in 2018/19, down from 5.4 percent in the previous fiscal year, due to growing domestic and external headwinds.
London-based Fitch Solutions expected monetary and fiscal policies to be tight to address economic imbalances, such as rising inflation, a widening fiscal deficit and falling foreign exchange reserves.
“Tighter monetary policy and a weak currency are likely to result in a loss in purchasing power among consumers,” it said. “Meanwhile, austerity measures, rising geopolitical tensions with neighbouring India and slowing global growth will also pose headwinds to Pakistan’s growth outlook over the coming quarters.”
Fitch Solutions said the economy will likely undergo a period of painful readjustment over the near term. But, a possible deal between Pakistan and the International Monetary Fund (IMF) would be a positive signal “and could see growth surprise to the upside should further reforms be implemented to help reduce current imbalances and attract more investment”.
Fitch Solutions said tighter economic policy and waning consumer demand would take a toll on private consumption, which accounts for 80 percent of GDP, and that is expected to slow to 4.1 percent in FY2019 from 6.3 percent in FY2018.
“We believe that the State Bank of Pakistan (SBP) will maintain a hawkish stance as inflation in February remained elevated at 8.2 percent y-o-y, far above the SBP’s annual target of 6 percent, despite already having hiked interest rates by 275 basis points since July 2018,” Fitch Solutions said. “Higher interest rates will naturally put downside pressure on consumption.”
Fitch Solutions sees a limited chance of strong rebound in rupee that has been devalued three times since July 2018 and that entails high cost of production and consumption for imports-reliant Pakistan.
The Fitch research arm sees an unlikelihood of exports sector to recover in the coming months despite rupee devaluation as the country’s main trading partners, including US, UK, Germany and China are likely to face “greater headwinds to growth”.
Fitch Solutions said austerity measures are also expected to contain growth. “We believe that the Khan administration will likely pursue greater austerity as an IMF bailout package is increasingly on the cards.”
Fitch Solutions said growing geopolitical tensions and weakening global growth picture are expected to slash investment to 5.1 percent in FY2019 from 5.7 percent in FY2018.
(This news/article originally appeared in The News on March 14th, 2019)