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Macroeconomic Imbalances Loom Warns World Bank

The World Bank has warned that the economy is now at risk given the scale of the macroeconomic imbalances growing within it. All through last year the World Bank largely maintained a silence. The growth rate is now troubled by the difficulties of the external sector. Pakistan will need to continue with economic reforms and pursue policies that make the country compete better in global markets. According to World Bank the growth rate going forward will be heavily driven by spending, personal as well as government. The spending, in turn, will be driven by rising remittances and election-related expenditures.

The current account deficit, that jumped by 112 percent years on year in the first quarter of the fiscal will rise to 4 percent of GDP by the end of the year. Election spending could boost the growth rate of the economy, even if temporarily, but the fiscal deficit could jump to 6 percent of GDP in the process. This would mean rising levels of debt to pay for the gap. Timely corrective steps are required, the report warns, to avert an abrupt slowdown.

Pakistan’s macroeconomic conditions have significantly deteriorated in the past one year. There was heavy reliance on short-term foreign commercial loans that can create repayment issues for Pakistan. The socio-economic issues in its Pakistan Development Update report stressed Pakistan to have an “able tax administration” to broaden the extremely narrow tax base. The report also stressed the need to devalue the rupee against the US dollar, saying an overvalued currency severely damaged the exports.

The World Bank said that Pakistan’s reliance on short-term foreign commercial loans has significantly increased and the government obtained $5.8 billion short-term loans in just two years. Pakistan received record-high gross disbursements amounting to $10.1 billion in last fiscal year and 43 percent of them came from commercial banks.

It projected that Pakistan will miss all key macro indicators targets set for this fiscal year, notably fiscal deficit, current account deficit and annual economic growth rate. Against the government’s target of limiting budget deficit to Rs1.5 trillion or 4.1 percent of the GDP, the lender has projected roughly 6.1 percent of the GDP or Rs2.2 trillion deficits for this fiscal year. It said that against the official target of 6 percent annual GDP growth rate, the economy is expected to grow at a pace of 5.5 percent this year. It has projected a 4 percent current account deficit against the official target of 2.6 percent of the GDP. This would mean there will be more pressure on already sliding foreign currency reserves.

“The wide current account deficit is expected to remain a concern and pressure on international reserves is likely to persist.” There is a need to maintain a competitive Real Effective Exchange Rate (REER. This is supporting exports and import-competing industries – as well as efforts to improving revenue collection and improving coordination between the federal and provincial governments to reduce public spending, according to the World Bank.

The World Bank raised alarms for Pakistan’s economy and predicted that inflation would increase to six percent next year as it linked Pakistan’s bullish economic prospects with the continuation of reforms. However, despite an increase in macroeconomic imbalances during fiscal year 2017, growth is projected to increase moderately and touch 5.8 percent by fiscal year 2019.

EXPORT, IMPORT SCENARIO

Policy adjustment is required to reverse the imbalances and restore and maintain macroeconomic stability. Exports are expected to recover during fiscal year 2018 and fiscal year 2019 as supply side factors ease, including an improved electricity supply and low domestic lending rates. The slowdown in imports is mainly due to the high import base in fiscal year 2017. The World Bank, however, said import growth is linked to investments in China-Pakistan Economic Corridor (CPEC) projects. It projected a moderate growth in investment due to higher capital expenditures by the government and an increase in foreign direct investment and external loans for CPEC projects.

The World Bank said growth in remittances will remain subdued, “given the gradual economic recovery projected in the GCC (gulf cooperation council) countries.” The Bank said the upcoming strategic trade policy framework (2018-2023) would define the country’s intention to reverse the decline in exports.

Policy framework should include reforms in tariff rationalization, diversification, and integration with global value chain. A flexible exchange rate should help the economy adjust to these pressures. The World Bank expected fiscal deficit to widen in fiscal year 2018 and fiscal year 2019. The average fiscal deficit was recorded at 6.3 percent during the previous two election cycles, it said. The Bank stressed the need of short to long term fiscal reforms, including broadening of tax base.

It called for a comprehensive review of tax policy, saying currently it is against the key principles of neutrality, fairness and transparency. “A fully automated and able tax administration is imperative to take advantage of modern IT infrastructure that uses the available data to reduce chances of tax evasion,” it said.

Economist Dr Ashfaque Hasan Khan has recently foreseen the widening current account deficit to be creating a serious balance of payments crisis for Pakistan by March-April 2018, forcing the government to re-negotiate a bailout package with the IMF by that time.

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