KARACHI: International ratings agency Fitch has cut its forecast for Pakistan’s real gross domestic product (GDP) to 4.7 per cent for the current fiscal year on Thursday, adding that an International Monetary Fund (IMF) bailout seems likely.
Fitch Ratings had earlier placed Pakistan on ‘negative list’ in January due to rising external pressures after current account deficit tripled in last three years. At a meeting held on Sept 21, Associate Director of Sovereigns Jeremy Zook said that the imports bill will increase following the China-Pakistan Economic Corridor related shipments and rising oil prices warning that the rupee depreciation and tight monetary stance would not be enough to tackle the crisis.
“Pakistan[‘s] economy is overheating and will likely face a reset in one form or another over the coming quarters, leading to a sharp decline in imports”, said the report released on Thursday.
The report highlights that if Pakistan decides to opt for an IMF led bailout, it will likely lead to “import crunch and higher interest rates” subsequently deteriorating the investment environment and push consumption growth on a downward trajectory.
The report argued that, “while the net exports account – a component of GDP by expenditure breakdown – will improve dramatically, this will come at the expense of a collapse in investment and consumption as reduced availability of imports undermines domestic production.
As such, we are forecasting real GDP growth to slow to 4.7pc in FY19 and 4.3pc in FY20, from 5.8pc in the previous fiscal year”.
It also warns that the country’s external accounts are nearing a breaking point with external position in a precarious position since foreign exchange reserves have fallen to alarming low levels of $16 billion – barely three months of imports cover. Highlighting the widening twin deficits, the report mentions that “additionally, the trade deficit remains wide at $3bn in August, while the current account deficit came in at $1.9bn in July.
This shows that the country is accumulating external debt, which already reached an all-time high of $95.1bn in 2Q18. In 1QFY18 Pakistan’s net international investment position stood at $112bn – representing close to 40pc of GDP – up by a staggering 50pc from just two years ago.”
The London based ratings agency said that following an agreement with IMF – which seems likely – investor confidence would receive a significant boost and grant short-term support to external accounts. However, it also warned that the “IMF will likely push for the State Bank of Pakistan (SBP) to impose higher interest rates and higher reserve targets which could trigger a reduction in imports”.
SBP Monetary Policy Committee will meet tomorrow to unveil its decision on policy rate hike; market anticipates a 75-100 basis points rise.
Asian Development Bank (ADB) in its Asian Development Outlook Update on Wednesday also cut Pakistan’s economic growth expectation by one percent to 4.8pc for the ongoing fiscal year.
Published in Dawn, September 28th, 2018