ISLAMABAD: The International Monetary Fund (IMF) on Tuesday forecast a subdued economic growth rate for Pakistan coupled with elevated rate of inflation and rising unemployment during the current fiscal year.
In its World Economic Outlook (WEO) 2020, the IMF projected Pakistan’s growth rate at one per cent, average inflation rate at 8.8pc, current account deficit at 2.5pc of GDP (gross domestic product) and unemployment rising by 0.6pc to 5.1pc during the current fiscal year. This is in sharp contrast with targets of 2.1pc GDP growth rate, 6.5pc inflation and 1.5pc current account deficit set by the government.
Going forward, the Washington-based lending agency projected the economic growth rate recovering to 5pc of GDP by 2025. It said the rate of inflation would be peaking at 10.2pc at the end of FY2021. The IMF estimated current account deficit rising from 1.1pc of GDP in FY2020 to 2.5pc in FY2021 and then going up to 2.7pc in FY2025.
The WEO projected global growth at -4.4pc in 2020 — 0.8 percentage point above the June 2020 forecast. It said the stronger projection for 2020 compared with the June 2020 estimates reflected the net effect of two competing factors: the upward impetus from better-than-anticipated second quarter GDP outturns (mostly in advanced economies) versus the downdraft from persistent social distancing and stalled re-openings in the second half of the year.
Projects average inflation rate at 8.8pc and current account deficit at 2.5pc of GDP this year
The WEO noted that recovery had taken root in the third quarter of 2020 and was expected to strengthen gradually over 2021. “The recovery is likely to be characterised by persistent social distancing until health risks are addressed and countries may have to again tighten mitigation measures depending on the spread of the virus,” it added.
The IMF projected the global growth at 5.2pc in 2021 — 0.2 percentage point lower than the growth estimated in June 2020. The projected 2021 rebound following the deep 2020 downturn implies a small expected increase in global GDP over 2020-21 of 0.6 percentage point relative to 2019.
The WEO noted that remittance flows contracted sharply during the early lockdown period but had shown signs of recovery. “Nonetheless, the risk of a decline in payments and transfers from migrant workers back to their home countries is very significant, particularly for such countries as Bangladesh, Egypt, Guatemala, Pakistan, the Philippines, and those in sub-Saharan Africa more broadly,” said IMF Economic Counsellor and Director of Research Gita Gopinath.
More generally, the IMF said the global economy was climbing out from the depths to which it had plummeted during the ‘great lockdown’ in April. But with the Covid-19 pandemic continuing to spread, many countries have slowed reopening and some are reinstating partial lockdowns to protect susceptible populations. While recovery in China has been faster than expected, the global economy’s long ascent back to pre-pandemic levels of activity remains prone to setbacks.
The WEO noted that more than one million lives had been lost to Covid-19 since the start of the year and the toll continued to rise. Many more have suffered serious illness. “Close to 90 million people are expected to fall into extreme deprivation this year,” the IMF said.
The prevention of further setbacks will require that policy support is not prematurely withdrawn. The path ahead will require skillful domestic policies that manage trade-offs between lifting near-term activity and addressing medium-term challenges, it said, adding that sustaining the recovery will also require strong international cooperation on health and financial support for countries facing liquidity shortfalls.
The IMF advised the governments, where possible, to continue to support viable but still vulnerable firms with moratoria on debt service and equity-like support to preserve jobs. Over time, once the recovery has taken a strong hold, policies should shift gradually to facilitating reallocation of workers from sectors likely to shrink on a long-term basis (travel) to growing sectors (e-commerce).
Along the transition, workers will need to be supported, including through income transfers, retraining and re-skilling programmes. The constrained countries will need to create room for immediate spending needs by prioritising crisis countermeasures and reducing poorly targeted subsidies. Some will require additional help from creditors and donors through debt restructuring, grants and concessional financing, building on important initiatives under way.
The loss of human capital accumulation after widespread school closures poses an additional challenge. Moreover, sovereign debt levels are set to increase significantly even as downgrades to potential output imply a smaller tax base that makes it harder to service the debt. On the plus side, the prospects of low interest rates over a longer period, alongside the projected rebound in growth in 2021, can help alleviate debt service burdens in many countries.
The IMF advised its member countries to design near-term support policies with a view toward placing economies on paths of stronger, equitable and sustainable growth. Also, investments in health and education (including remedying losses incurred during the pandemic) can help achieve participatory and inclusive growth.
Published in Dawn, October 14th, 2020