KARACHI: Pakistan’s economy is expected to undergo ‘macro adjustment’ in 2019 after going through one of the ‘strongest growth phases over the past five years’ which led to fiscal and current account deficits at above six per cent of the GDP, said EFG Hermes, the Middle Eastern financial research and brokerage firm, on Thursday.
The report warns that if the government “wants to avoid a sudden stop to the economy,” an International Monetary Fund (IMF) programme is “unavoidable”.
The adjustment is expected to come at the cost of economic growth which reached decade highs primarily “fuelled by a rare combination of accommodative monetary policy and fiscal policies, low inflation, low oil prices, and improved security.”
However, negotiations between the IMF and government have already gone sour over the pace of adjustment. The “IMF is looking for a more rapid approach to deal with the economy’s sizeable misalignment” whereas the government is looking for “a more extended implementation of macro adjustment to avoid inflicting financial pain on the public.”
In its estimates for GDP growth, EFG Hermes paints a bleak picture of Pakistan’s economy. The country’s nominal GDP is likely to shrink to $285 billion by 2020 from $313bn in 2018. Subsequently, GDP growth is expected to slow down to 3.8pc by 2020.
The publication also highlights that government’s steps to align the economy may “still fall short of setting the economy on a more sustainable path.” The government has already taken some hard-hitting measures such as increasing gas and electricity tariffs, devaluing the currency and raising interest rate by 250 basis points.
The Egypt-based firm sees “further devaluation of dollar-rupee (5-10pc), as well as interest rate hikes (100-150bps).” Rupee’s depreciation within a short span of time has resulted in a sharp spike in inflation with core inflation at its five-year high.
EFG Hermes also anticipates multiple risks for Pakistan’s economy in 2019 in the form of higher than expected deprecation, aggressive monetary tightening and lack of agreement over the pace of adjustment with the IMF.
Published in Dawn, December 7th, 2018