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World Bank concerned over the macroeconomic stability of Pakistan

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Waqas Shabbir |

World Bank has shown apprehensions over the macroeconomic stability of Pakistan, and expressed discontent with the near-term economic outlook, which will require adequate measures to deal with the correct external and domestic imbalances. In its report on ‘South Asia Economic Focus Spring 2018’, World Bank acknowledged the depreciation of Pakistan’s rupee and said that it may support an improved external balance.

GDP growth is projected to reach 5.8% in FY2018. Under the China-Pakistan Economic Corridor (CPEC), the construction of new roads, ports, and better railway network along with the improved energy supply, Pakistan’s growth rate should continue to rise in coming years. The report says that macroeconomic and political risks have increased considerably in FY2018. Analyzing the risk facing Pakistan, it says, “The balance of payments position is particularly vulnerable at the current level of reserves.

Upcoming elections may delay decisive policy adjustment, such as increased exchange rate flexibility and fiscal consolidation, until after the elections. In the medium-term, the government needs to put considerable effort in reforming its tax system and tackle competitiveness challenges. A strategy based on lowering the cost of doing business and improving productivity would be critical for higher and sustainable export growth”.

The announcement of tax amnesty scheme, measures to improve the tax base, certain austerity measures at provincial, better remittances figures, and federal level, administrative measures to support fiscal consolidation can help bridge the twin deficit.

The persistent pressure on current account is expected to remain, until FY2019, when further devaluation may improve the export situation and decline in imports. Moreover, Fiscal deficits are projected to narrow in FY19 as authorities adjust macroeconomic policies, which will possibly, if the tax base is widened and amnesty scheme is successful, besides improved administrative measures to assist in fiscal consolidation.

“The correlation between global trends and stock market developments in Pakistan is weaker”, WB asserted.  It was apparent as “Pakistan the Karachi Stock Exchange 100 Index (KSE 100 Index) was on a downward trend until the devaluations of December 2017 and March 2018 pushed stock market prices up again. This downward trend had started around May 2017, after a period of exuberance that reflected an expected upgrade to the MSCI Emerging Market Index and greater confidence on macroeconomic stability”.

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Citing the impact of devaluation on fortunes of Stock exchange, WB said that “declining trend was reverted after the Pakistan rupee depreciated by 5 percent in December, which prompted the KSE 100 Index to jump by around 5000 points”.

The trend in Pakistan’s real GDP growth is upward, but, despite the favorable conditions, WB said that growth in the region has reached a plateau. Though Pakistan’s economic growth is positive, its macroeconomic imbalances have remained a major concern. Derided by the ever-increasing twin-deficit and huge public debt, Pakistan’s economy remains on the edge due to plunging foreign reserves and stagnant tax revenues, which have been historically hovering around 10pc of GDP.

The report says that macroeconomic and political risks have increased considerably in FY2018. Analyzing the risk facing Pakistan, it says, “The balance of payments position is particularly vulnerable at the current level of reserves.

Pakistan’s core inflation prices remain stable; nevertheless, it was 0.7 percentage points above the core inflation in 2016. But, consumer price Inflation was higher as compared to core inflation prices. Though, inflation remained below average overall. It remained 2.2 percentage points below the target of 5 percent.  But it did rise after depreciation in rupee. But, this mild depreciation did not lead to higher inflation so far.

The expectation is that inflation will rise in FY2019 and will remain on the higher end in FY2020. Since Pakistan has devalued currency twice and it may get depreciated once more in June, anticipation is that further decline in exchange rate coupled with a decline in oil prices will decrease the domestic prices.

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To slow down the pre-empt pressure on the economy and in reaction to steadily increasing core inflation and depreciating rupee, Pakistan raised its interest rate slightly at the end of January by 25 bps.

Amid widening trade and current deficits, finally, exports showed the positive trend in the third quarter, but exports have shown increasing trend. In March, Pakistan exports witnessed an increase of 24% in March, apparently due to credible efforts to improve the exporter’s confidence through incentive packages and Ismail Miata’s stance to allow the rupee depreciate to assist exporters.

Pakistan’s core inflation prices remain stable; nevertheless, it was 0.7 percentage points above the core inflation in 2016. But, consumer price Inflation was higher as compared to core inflation prices. Though, inflation remained below average overall.

But, imports remain high despite efforts to restrict them. Though, hike in export is encouraging but, year-on-year basis the trade deficit has reached $27.3 billion this fiscal year as compared to $23.3 billion in FY17. Nevertheless, it has shown a drop of 5% in March 2018 as compared to March 2017.

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Moreover, inflows of workers’ remittances sent by overseas Pakistanis has witnessed much-needed surge to $14.6 billion, showing a 3.5% year-on-year growth, in the first nine months [July to March] of the current fiscal year (FY).

The announcement of tax amnesty scheme, measures to improve the tax base, certain austerity measures at provincial, better remittances figures, and federal level, administrative measures to support fiscal consolidation can help bridge the twin deficit. Finally, the depreciation in nominal exchange rate improve these vital indicators and going forward, they can also improve competitiveness.

Waqas Shabbir is a Derby Business School graduate in Finance, currently working as a freelance writer. The views expressed are those of the author and do not necessarily reflect GVS editorial policy.

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