Growth to plummet, fiscal deficit to skyrocket: WB

Updated 13 Apr 2020

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External sector to be hit by falling remittances, rising outflows and rescheduling issues in ‘non-traditional debt’. — AFP/File
External sector to be hit by falling remittances, rising outflows and rescheduling issues in ‘non-traditional debt’. — AFP/File

ISLAMABAD: Pakistan faces sharp economic recession along with a skyrocketing fiscal deficit as fallout from the prevailing global coronavirus pandemic, the World Bank said on Sunday. In addition, the country’s external position will come under serious stress as remittances can see a significant fall while portfolio outflows continue and the “non-traditional debt” from countries like Saudi Arabia, China and the United Arab Emirates has to be renegotiated.

Provision of support systems for the unemployed as well as small businesses, along with massive investments in healthcare infrastructure, are likely to place a steeply rising burden on fiscal resources as the country grapples with the continuing fallout. Growth will remain subdued all through next year as well, according to projections contained in the World Bank’s latest report.

“Pakistan, which has already experienced low growth rates in recent years, could well fall into a recession,” the Washington-based multilateral lending agency said in one of its flagship publications ‘South Asia Economic Focus’, adding that Pakistan’s economy could in fact shrink, registering a negative growth rate of 2.2 per cent in the worst case scenario, or 1.3pc in the better scenario.

External sector to be hit by falling remittances, rising outflows and rescheduling issues in ‘non-traditional debt’

Just last week the bank had estimated that the country’s economic output would grow by 1pc, which itself was a significant downgrade.

“With 1.8 per cent population growth, that would imply a painful decline in per capita income,” the report said.

The report was released during a virtual meeting of World Bank Vice President for South Asia Region Hartwig Schafer and WB Chief Economist for South Asia Region Hans Timmer with a select group of journalists from South Asia.

According to Mr Hans, government’s priority should be to ensure that everybody has access to healthcare, ensure smooth food supply, create temporary jobs, especially for migrant workers, prevent bankruptcy of small and medium enterprises and, in the long run, rebuild the economy on a sustainable basis.

The worst case scenario projected by the report says if the lockdowns remain in place for two to four months, overall employment can decline by anywhere from 2.4pc to 9pc of total employment in some sectors of Pakistan. The sectors identified to bear the brunt of the lockdown are retail trade, land transportation, entertainment, accommodation and restaurants, tourist services, water transport and air transport.

Output to fall

The economic “output is expected to contract sharply in Q4-FY20, bringing overall FY20 growth to [negative] 1.3 per cent”, the WB report says. In the next fiscal year, GDP growth is expected to rise slightly to 0.9pc, followed by 3.2pc in FY22. These developments have put pressure on Pakistan’s fiscal position as tax collection is being adversely impacted while spending needs are increasing.

The GDP performance is based on a nominal growth of 1pc in agriculture this year, but a decline of 2.1pc in industrial output and 1.7pc fall in the services sector. The agriculture sector will grow by 1.7pc in FY2020-21 and 2.3pc in FY2021-22.

After the setback in the current year, the industrial output is estimated to improve to 0.7pc in FY2020-21 and 3.7pc in 2021-22. Also, from a negative of 1.7pc, the industrial output will show a slight growth of 0.8pc in 2020-21 and 3.4pc in 2021-22.

Meanwhile, average monthly inflation is set to remain 11.8pc for the current year, followed by 9.5pc next year and down to 6pc in 2021-22. Likewise, current account deficit is projected at 1.9pc this year, 2pc next year and 2.2pc in 2021-22.

On the other hand, the fiscal deficit is expected to rise sharply from projections and targets, possibly breaching last year’s record high. For the current year, the World Bank projected fiscal deficit at a record 9.5pc, followed by 8.7pc next fiscal year and about 6pc in 2021-22. As a consequence, debt-to-GDP ratio for Pakistan will rise to 90.6pc this year, soar to 91.8pc in 2020-21 and slightly come down to 89.6pc in FY2021-22, the World Bank said.

But Pakistan is not the only country in tough conditions. The bank said the economic outlook for South Asia was dire as the region will likely see the worst economic performance of the last 40 years. Because of the unparalleled uncertainty, the WB report presents a range of forecast, estimating that regional growth will fall to anywhere between 1.8pc and 2.8pc in 2020, down from 6.3pc projected six months ago.

The hardest hit is Maldives where GDP is expected to decline by between 8.5pc and 13pc this year, as tourism has dried up. Afghanistan, Pakistan and Sri Lanka all have projected negative GDP growth rates. In the worst case scenario, the whole region can experience a contraction in its GDP.

External sector

The current account deficit is projected to narrow to 1.9pc in FY20, as imports contract more rapidly than exports. Export growth is expected to remain negative in FY21 but to rebound thereafter and reach 6.7pc in FY22. Similarly, imports are expected to recover slowly from FY22 onwards, as domestic industrial activities pick up.

Remittances are expected to contract by 6.5pc and 6.0pc in FY20 and FY21, respectively, due to lower growth in the Gulf Cooperation Council economies. Increased multilateral and bilateral flows are expected to be the main financing sources over the medium-term. The World Bank said these projections were subject to considerable risks and challenges.

In the near-term, continued outflows of portfolio investments in government securities may further erode Pakistan’s limited external buffers and contribute to exchange rate volatility. Additionally, volatility of oil prices and difficulty in rolling over of bilateral debt from non-traditional donors (China, Saudi Arabia and the UAE) would compound Pakistan’s external risks and contribute to higher financing gaps.

The poverty outlook for FY21 will depend critically on the ability of the informal off-farm sector to recover from the current crisis. The duration of the crisis and the capacity of government interventions to protect investments in physical and human capital of the most vulnerable segments of the population will be important to prevent long lasting consequences.

Published in Dawn, April 13th, 2020