More inflation ahead

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Pakistan’s economic growth to slow down for the next two years as it faces yet another macroeconomic crisis due to massive twin deficits and low foreign reserves. Prime Minister Imran Khan’s government would miss inflation, public debt, and fiscal deficit reduction targets, while underlining major challenges that the government will encounter at least till the end of the third year in power.
According to the World Bank’s forecast, GDP growth (at factor cost) decelerated to 3.3 per cent in FY19 – 2.2 percentage points lower than FY18 – as gradual policy adjustments to tackle macroeconomic imbalances started to take effect. These adjustments included a tightened monetary stance, cuts in public sector development expenditures, and enhanced focus on higher tax collections. As a result, large scale manufacturing, this accounts for half of the overall industrial output, contracted by 3.6 per cent in FY19. The services sector, which contributes over 60 per cent to total output, decelerated to 4.7 per cent in FY19 compared to 6.2 per cent last year.
Despite having an IMF extended fund facility, the country’s economic growth was expected to remain low in the near term and that Pakistan’s economic behaviour is different than all the other South Asian nations. The medium-term growth outlook hinges upon the country’s ability to implement necessary structural reforms to boost competitiveness and achieve sustained growth. Progress in poverty reduction is expected to be limited during the macroeconomic adjustment period. Measures to restore macroeconomic stability in Pakistan weigh heavily on growth, which is expected to have dropped to 3.3 per cent. Economic policies over the past few years have resulted in increased debt levels and erosion of fiscal and external buffers, affecting the economy’s ability to absorb shocks. The country needs to restore these buffers, especially because turbulence in global financial markets could affect the country’s access to private external financing. And the weakening global economy and rising trade tensions could dampen external demand. Increased pressures on the asset quality and capital adequacy buffers due to the economic slowdown and the inflationary environment could hold back the forecasted rebound in growth, especially when strong short-term deposit mobilisation due to recent increases in policy, rates continue to be intermediated mostly towards government securities.
The main domestic risk emerges from potential difficulties in implementing the necessary adjustments and structural reforms. The vulnerable households’ ability to weather the economic impact of the crisis will depend on the inclusiveness of growth, the food and non-food inflation, and the resilience of sectors relevant for their employment agriculture, construction and wholesale and retail trade.

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