Pakistan economy to 'recover slightly' from 2021 but reforms critical for growth: UN report

Updated January 17, 2020

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A continued commitment to reform and productive investment in infrastructure and strategic capacity development will be critical for the country to find its way back to its previous growth path. — AFP/File
A continued commitment to reform and productive investment in infrastructure and strategic capacity development will be critical for the country to find its way back to its previous growth path. — AFP/File

Pakistan's economy is expected to recover slightly from 2021 onward as increased government revenues from a tax hike allow expanded public investment and as other government reforms required by the International Monetary Fund (IMF) begin to bear fruit, says the latest United Nations report on the state of the world economy.

The ‘World Economic Situation and Prospects 2020’ report emphasised that “continued commitment to reform, combined with productive investment in infrastructure and strategic capacity development, will be critical for the country to find its way back to its previous growth path.”

Pakistan has been struggling with a balance-of-payments crisis and the burden of high public debt, which have led to an arrangement with the IMF and corresponding fiscal tightening. High inflation and security concerns have hurt domestic demand and private investment, and the government’s ability to address the slowdown has been severely curtailed by the fiscal tightening, said the report launched on Thursday.

Read: Economic stabilisation has failed to bring growth: PM aide

It noted that export growth has fallen to 0.4 per cent owing to "disappointing sales of textiles", which constitute 60pc of the country’s goods exports. "GDP growth has remained weak at 3.3pc in both 2018 and 2019 – well below the 4 to 6pc range of previous years," it said.

Meanwhile, the State Bank of Pakistan is balancing a stronger commitment to inflation targeting with a managed depreciation of the currency, but this is complicated by increases in energy tariffs that have been imposed as part of the fiscal reforms package.

"While the tightened monetary policy in Pakistan is expected to help move inflation towards target levels in the years to come, the country’s inflation remains extremely vulnerable to fuel price fluctuations and weather conditions, as is the case for most countries in the region," the report cautioned.

South Asia growth likely to rebound

Growth in South Asia is projected to rebound in 2020, but the region will continue to face daunting challenges to sustainable development, according to the UN report.

Economic growth in South Asia is forecast to recover to 5.1pc in 2020 after falling to a decade-low of 3.3pc in 2019, but it will remain well below the rates seen in the recent past.

The region struggled in 2019 with a combination of external headwinds, notably the global economic slowdown and falling trade, and country-specific domestic challenges. As the effects of one-off shocks wane and governments respond with vigorous fiscal expansion, economic activity will rebound in most of the countries.

According to the report, after experiencing a sharp economic slowdown from 6.8pc in 2018 to 5.7pc in 2019, India has committed to an ambitious fiscal expansion plan to complement the country’s already loose monetary policy.

The combination of the fiscal stimulus and financial sector reforms, boosting investment and consumption, is expected to support a recovery in growth to 6.6pc, but it will take continued structural reforms to bring India’s growth back to its previous levels.

The risks to South Asia’s economic outlook are heavily tilted to the downside, the report noted. The region remains exposed to external shocks, notably trade shocks and climate change, due to insufficiently climate-resilient infrastructure and a lack of economic diversification in most countries.

Structural challenges also include the low quality of employment, with gender barriers in the labour market among the highest in the world. High-quality formal employment continues to be a distant dream for most people in South Asia, hampering the region’s long-term development prospects. As economic growth recovers, policy makers will urgently need to address these structural barriers to development, the report says.

Global economy slows as trade disputes bite

Impacted by prolonged trade disputes, the global economy suffered its lowest growth in a decade, slipping to 2.3pc in 2019. The world, however, could see a slight uptick in economic activity in 2020 if risks are kept at bay, according to the report.

The document stated that a growth of 2.5pc in the ongoing year is possible, but a flareup in trade tensions, financial turmoil, or an escalation of geopolitical tensions could derail a recovery. In a downside scenario, global growth would slow to just 1.8pc this year.

A prolonged weakness in global economic activity may cause significant setbacks for sustainable development, including the goals to eradicate poverty and create decent jobs for all. At the same time, pervasive inequalities and the deepening climate crisis are fuelling growing discontent in many parts of the world, the report noted.