Pakistan’s economic growth likely to touch nine year low

KARACHI, Dec 18 (INP) – Pakistan’s economic growth in the current fiscal year would likely to touch nine year low dipping to almost 2.9 percent as the looming balance payment of position, cut in development expenses, monetary tightening and depreciation in the local currency to slow down domestic consumption and investment, a report of Economic Intelligence Unit said.

“We believe that the government’s efforts to address the country’s looming balance-of-payments crisis will have a dampening effect on economic expansion”, the report said.

“We expect real GDP growth to average 2.9% a year in 2018/19 – 2022/23. The IMF will prompt the government to cut planned development and social spending significantly, exerting a drag on GDP growth.”

Against this background, we expect growth in both private and government consumption to slow. The introduction of tight government controls on imports will curb investment growth in 2018/19-2020/21, as it becomes harder to import goods into the country, although growth should pick up after 2022 as Pakistan’s IMF program comes to an end.

Inflation to pick up driven due to anticipated weakening of the local currency. “We expect inflationary pressures to also be fuelled by the increase in gas and electricity prices likely to be mandated under the IMF’s rescue plan”, the report said.

“We expect the SBP to respond with a sharp tightening of monetary policy in order to counter inflationary pressures, particularly in the first half of the forecast period. Overall, we expect annual consumer price inflation to average 7.3% in 2019-23”, the report said.

On exchange rate the Unit said that on November 30th the rupee lost 4.3% of its value against the US dollar compared with the previous day’s trading. The rupee’s fall was the latest in a series of step depreciations that began in December 2017.

The SBP operates a heavily managed exchange-rate regime. Given the rapid widening of the current-account deficit, this has provided a greater degree of control than would be the case under a floating exchange-rate system. Nevertheless, we anticipate further devaluation of the Pakistan rupee and expect the exchange rate to average PRs139.9:US$1 in 2019. The local currency is likely to continue on this depreciatory trajectory throughout the forecast period, with the exchange rate expected to average PRs142.4:US$1 in 2020-23.

“The IMF package, coupled with lending from other bilateral donors, is likely to stabilise Pakistan’s external sector. Exports will be boosted by robust external demand and the weakening of the Pakistan rupee”, the report said.

Further support to the external accounts will come from strong remittance inflows. We expect government controls to slow import growth, particularly in the first half of the forecast period. However, with demand for oil imports being largely inelastic, the expected depreciation in the local currency and an elevated level of oil prices in 2019-23 will lead to a swelling of the oil import bill. Overall, we expect the current-account deficit to average the equivalent of 3.7% of GDP in 2019-23, compared with the estimated average of 5.4% in 2017-18.

Inp/khan