"Improving the external balance hinges upon a revival in exports, a slowdown in imports, and stable remittance flows. In absence of any of these factors, the persistent current account deficit will put further pressure on already dwindling reserves," said the WB.
In Pakistan, macroeconomic discipline arguably weakened after the International Monetary Fund (IMF) program came to an end. In recent years, there had been clear progress in restoring macroeconomic stability and laying some of the foundations for higher growth.
Since the IMF program came to an end, external indicators of the economy have deteriorated. The current account deficit more than doubled from 1.6 percent of GDP in fiscal year 2016 to 4.0 percent in fiscal year 2017. New data for July-August shows a continuation of this trend, with the current account deficit doubling compared to the same period last year. Inflation, after remaining moderate during fiscal year 2017, is expected to rise in fiscal year 2018 and fiscal year 2019 due to higher domestic demand pressures and a slight increase in international oil prices.
The pressure on the current account is expected to persist as the trade deficit will remain elevated during fiscal year 2018 and fiscal year 2019. This situation can potentially become unsustainable in the absence of corrective policy measures.
Despite concerns about its weakening macroeconomic discipline, growth in Pakistan is expected to increase to 5.5 percent in 2018 and to 5.8 percent in 2019, maintained the report. Exports are expected to recover during fiscal year 2018 and fiscal year 2019 due to an easing of supply side factors. Imports, after strong growth of 17.7 percent in fiscal year 2017, are expected to grow at a slower pace in fiscal year 2018 and fiscal year 2019, states the report.
Efforts to reverse the trade and fiscal imbalances and continued implementation of reforms will be needed for sustaining and accelerating growth and improving welfare.
The reserve coverage has also declined. One year ago, Pakistan was in a comfortable position, as international reserves were large enough to cover the current account deficit, to service external debt and even the total volume of portfolio investments in the country. By now international reserves still cover the first two items, but not the third one. Addressing the sources of this increased vulnerability should be a priority.
The report further maintains that the fiscal position is also expected to deteriorate during the election cycle, which would affect debt trends and maintain debt at the current high level. The ouster of ex-Prime Minister Nawaz Sharif has enhanced political risks and created some policy uncertainty. The upcoming national election in 2018 may affect the reform momentum and macroeconomic policy. Slower progress in much-needed structural reforms would weaken growth prospects and discourage private investment.
Pakistan''s growth outlook continues to improve and inflation remains contained. However, growing fiscal and external imbalances pose an immediate challenge to this outlook. Efforts to reverse the current imbalances and continued implementation of structural reforms will be needed for sustaining and accelerating growth and improving welfare, the WB report maintained.
The outlook until fiscal year 2019 is for moderately higher growth. This outlook is contingent upon continued macroeconomic and political stability, as well as a steady progress in implementing the main pillars of the government''s medium-term reform program, which tackles key constraints to growth. The outlook assumes that oil prices will increase moderately but remain low. On the supply side, impetus to growth is projected to come from the services and the industrial sectors. On the demand side, acceleration would be driven by public and private consumption, aided by a moderate increase in investment.
Remittances will continue to partly finance the current account deficit. It is also expected that FDI flows will strengthen due to the accelerated implementation of CPEC projects. However, capital and financial flows during fiscal year 2018 and fiscal year 2019 will only partly finance the current account deficit, which will result in a drawdown of reserves during these two years.
Fiscal slippages are expected to continue through the election cycle, which will result in a widening of the fiscal deficit during fiscal year 2018. This increase in the fiscal deficit is primarily driven by a slower increase in government tax revenues (both federal and provincial) and a sharper increase in expenditures. An adjustment in the fiscal position in fiscal year 2019 after the election will help in curtailing the fiscal deficit.
External borrowing helped keep reserves at relatively comfortable levels in fiscal year 2017, despite the large trade deficit. The external account pressure has persisted in fiscal year 2018, but despite this pressure the PKR has remained stable against the USD. The current external situation can become unsustainable in absence of adequate policy response.
Provisional data for fiscal year 2017 shows that the fiscal deficit stood at 5.6 percent of GDP, 2.1 percentage points higher than the budgeted estimate for fiscal year 2017. Lower-than-expected revenue, falling Coalition Support Funds (recorded as non-tax revenues), and an inability of provinces to generate surpluses drove this deterioration. As a result, the public debt to GDP ratio is expected to stay close to last year''s level of around 68.6 percent.
Pakistan''s GDP growth continued to increase and was 5.3 percent in fiscal year 2017. This performance fell short of the government''s growth target of 5.7 percent for fiscal year 2017 as the industrial sector performed worse than expected.
Public spending far exceeded budget plans with the fiscal deficit rising to 5.8 percent of GDP in fiscal year 2017, 2.1 percentage points above the initial budget target. This was despite an increase in total government revenue by 11 percent. The report states that in all countries, and especially in Pakistan, network members believe that the national currency is overvalued.
Copyright Business Recorder, 2017