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External pressures to worsen despite oil price declines: Fitch

Updated January 08, 2019


Government is left with little limited room to cut expenditure and suffers from a small tax base, notes Fitch Solutions. — File photo
Government is left with little limited room to cut expenditure and suffers from a small tax base, notes Fitch Solutions. — File photo

KARACHI: The country’s GDP growth rate will plunge to 4.4 per cent clouded by widening twin deficits – fiscal and external account — despite expectations of central bank holding rates steady to support ­economic activity, says Fitch Solutions in its latest analysis of Pakistan’s economy.

The macro research arm of the global credit ratings agency expects the State Bank to keep interest rates steady for the remaining fiscal year as it assesses the impact of aggressive monetary tightening in 2018 and turns its attention to support economic growth.

“Our core view is that the decline in energy imports and the cumulative rate hikes in 2018 will help to stabilise the country’s external account and anchor the rupee, allowing core inflation pressures to head lower over the coming months,” note the authors of the report.

On the other hand, the authors also warn that “the widening current account deficit, weakening currency, and dwindling foreign reserves ­suggest that the current fiscal trend (where expenditure continues to ­outpace revenue growth) is ­unsustainable.”

The report attributes the growing deficit to slipping fiscal discipline since 2016 amid mismatch in revenue growth and rising expenditure.

Stressing the urgency to reverse this trend, Fitch Solutions notes that the government is left with little limited room to cut expenditure and suffers from a small tax base posing challenges to raise revenue in the near-term.

“We maintain our view that an eventual IMF agreement is likely, but we believe that there will be limited scope for the government to cut expenditure substantially over the coming months.

In terms of current expenditure, a large debt servicing cost and huge military budget (which the government has little control over) suggest that there is little room for maneuvering,” warns the report.

The report notes that this is in addition to the financial drag on the economy from the loss-making state owned entities which the government plans to move to private ownership along the lines of Malaysia’s Khazanah Nasional.

Commenting on the external woes, Fitch Solutions sees no respite in near-term as “Pakistan’s external accounts continue to deteriorate despite the steep drop in oil prices, and with exports likely to come under pressure amid a global trade slowdown, we believe that a considerable non-oil import contraction is looking increasingly likely.”

However, the authors note that the effect of collapse of international oil prices has not resulted in the improvement of Pakistan’s trade balance yet while adding that the existing financial inflows are not adequate enough to cover imports, presaging an import crunch over the coming months.

The country’s trade deficit shrank by a meagre 2pc in November to $11.786 billion, according to the data released by the Pakistan Bureau of Statistics (PBS). The government is under immense pressure from the declining reserves and subdued growth in exports.

“The new PTI government has moved to secure financial assistance totalling $6bn from Saudi Arabia and recognises the immediate need to further secure a similar sum in International Monetary Fund emergency funding to enable imports to continue to be funded and the confidence of creditors to be maintained,” mentions the report adding that there are little prospects of an export rebound.

The report also notes that the inflow of remittances, bulk of which comes from the Middle East, will see a dip as the manpower exports to the region are expected to slow amid lower oil prices.

Published in Dawn, January 8th, 2019