According to a recent report by World Bank, Pakistan is currently exposed to major macroeconomic risks due to weak external balances during the fiscal year 2017-18. The problem has risen through consistent pressure from rising current account deficit which in turn is negatively affecting the national reserves.
Soon after the IMF program came to an end, Pakistan macroeconomic position became highly vulnerable, thus affecting all the major economic indicators. This was discussed in detail in the ‘The South Asia Economic Focus Fall 2017’ report released on Sunday before, the annual meetings of World Bank and IMF.
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The fiscal situation was relatively strong last year as country’s foreign exchange reserves were sufficient to cover the current account deficit, service debt payments and equal total portfolio investments. However, this year, the reserves can only cover the first two elements which can turn out to be highly risky as per the report.
Although Pakistan’s economy has been on a steady path during the last few years but the recent end to the IMF program changed things for the worse. The general perception about Pakistan had been positive due to two major reasons. Firstly, the country regained its status in the MSCI emerging market index that boosted investors’ confidence substantially. Secondly, developments of China-Pakistan Economic Corridor (CPEC) had also played a key role in creating a positive economic outlook.
The report suggests that Pakistan needs to stabilize its external accounts on priority basis. It needs to revive exports, reduce import volume, and ensure stable flow of remittances. However, if the economic managers fail to achieve these targets, current account gap would continue to dent the reserve position.
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Upcoming elections expected to dent fiscal position further
The report titled “Growth out of the blue” foresees that the upcoming election would give another blow to the fiscal status of Pakistan due to ever rising debts. Consequently, weaker structure would curtail growth momentum and eventually deter private investors.
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The outlook for fiscal year 2018 and 2019
The growth prospects for fiscal year 2018 and 2019 are expected to be moderately high but they are entirely dependent on some key factors. Ensuring political stability, maintaining macroeconomic discipline that will eventually sustain the reform process in the country. However, this economic outlook is based on the assumption that oil prices will show a conservative growth.
The demand side of the economy would be triggered by public and private consumption along with sustainable investment. While services and industrial sectors would continue to fill the supply side gap.
World Bank expects that the current account gap would continue to hamper economic prospects during the next two years. Furthermore, the matter can aggravate if sufficient steps are not taken immediately. However, some respite can come from exports which are expected to stabilize within the next two years. Imports will dampen during 2018 and 2019 after showing a substantial growth of 17.7% during 2017. Remittances will continue to cover the current account deficits.
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Foreign Direct Investment will consolidate as CPEC projects will gain momentum. However, influx of capital will continue remain sluggish thus only managing to finance the current account deficit during 2018 and 2019. Therefore, the report, Dawn confirmed, foresees Pakistan’s reserves to remain under pressure.
It has also been highlighted that slower growth in tax revenues and rising expenditures will escalate the matter of fiscal deficit. However, if appropriate adjustments are made soon after the elections, the fiscal position can improve.
Lastly, inflation which had been under control during 2017 is expected to increase during 2018 and 2019 due to high domestic demand and a meager increase in international oil prices.