In its latest analysis of Pakistan's economy, Fitch Solutions, a research arm of the global credit rating agency, expects the country's GDP growth rate to plunge to 4.4 percent during FY19. The economy will also be clouded by widening fiscal and external account deficits despite expectations of central bank holding the rates steady to support economic activity. On the positive side, the authors of the report have noted that "their core view is that the decline in energy imports and the cumulative rate hikes in FY19 will help stabilise the country's external account and anchor the rupee, "allowing the core inflation pressures to head lower over the coming months." On the other hand, the widening current account (C/A) deficit, weakening currency and dwindling foreign exchange reserves suggest that the current fiscal trends (expenditures outpacing growth in receipts) are unsustainable. Stressing the urgency to reverse the present fiscal trend, Fitch Solutions has observed that the government is left with limited room to cut expenditures and suffers from a small tax base. According to it, large debt servicing cost and huge military budget suggest that there is a little room for manoeuvrability. In addition, there was a huge financial drag on the economy from the loss-making state-owned entities. On the external side, the collapse of international oil prices has not resulted in Pakistan's trade balance improvement and financial inflows are not adequate enough to cover imports, presaging an import crunch over the coming months. While there were little prospects of an export rebound, the new PTI government has moved to secure financial assistance totalling dollar 6 billion from Saudi Arabia and other friendly countries.
By looking at the report, one feels that a lot of hard work has been done by its authors to assess Pakistan's economy and its prospects. Most of its observations appear to be well-founded though at places, the authors seem to be more pessimistic than some other agencies and organisations who are more aware of the economic situation in Pakistan. For instance, Fitch Solutions is of the view that country's GDP growth rate would plunge to 4.4 percent during the current year. It may be mentioned here that the growth rate during FY18 was 5.8 percent and targeted to increase to 6.2 percent in 2018-19. Though the performance of the last year and the target for the current fiscal year are impossible to be achieved due to slower growth in the agriculture and industrial sectors which may also adversely affect the services sector, the State Bank has projected the growth rate for the current fiscal year to be between 4.7 percent and 5.2 percent. A higher growth may soften price pressures in the economy and lead to higher exports. The authors of Fitch Solutions report are, however, right about growing fiscal deficit. The report attributes the growing fiscal deficit to slipping fiscal discipline since 2016 amid mismatch in revenue growth and rising expenditures. While government is very slow or refrains from taking additional revenue mobilisation measures, large debt servicing cost due to continuous increase in the outstanding stock of debt and huge military expenditures due to constant confrontation at the borders consume most of the budgetary resources and very little is left for other items of expenditure. Huge financial losses of Public Sector Enterprises (PSEs) are another drag on the budget that continues to increase over the years. The previous government intended to privatise some of the loss-making PSEs but could not translate its plan into reality due to stiff opposition by trade unions and Opposition parties. The present government does not want to touch the subject on the plea of large-scale unemployment that would follow. It has, however, promised to restructure the PSEs into profitable business organisations, knowing fully well that this would not happen. Commenting on the external woes, Fitch Solutions sees no respite as Pakistan's external sector continues to deteriorate despite a steep drop in oil prices. Exports are also likely to come under pressure amid a global trade slowdown. We are not so pessimistic and feel that substantial depreciation of the Pak rupee and imposition of higher duties on imports would certainly lead to contraction in trade deficit and improvement in the current account but with a reasonable time lag. Similarly, the report notes that the inflow of remittances, bulk of which comes from the Middle East, will see a dip as the manpower exports to the region are expected to slow down. Such an assertion is not backed by the recent trends as home remittances have shown a healthy growth during the recent months.