WB revises growth forecast down to 0.5pc

Published January 6, 2021
Pakistan’s economic growth rate for the current fiscal year is forecast to remain subdued at 0.5 per cent even though the global economy may expand by 4pc in 2021. — AFP/File
Pakistan’s economic growth rate for the current fiscal year is forecast to remain subdued at 0.5 per cent even though the global economy may expand by 4pc in 2021. — AFP/File

ISLAMABAD: Pakistan’s economic growth rate for the current fiscal year is forecast to remain subdued at 0.5 per cent even though the global economy may expand by 4pc in 2021.

“In Pakistan, the recovery is expected to be subdued, with growth at 0.5pc in FY2020-21”, said the World Bank on Tuesday in its Global Economic Prospects (GEP) 2021. Growth is projected to be held back by continued fiscal consolidation pressures and service sector weakness, it added.

The government has set a GDP growth target of 2.1pc for the current fiscal year.

Talking about the medium term, the bank estimated the economic recovery in the country to stay restrained, averaging 1.3pc over the next two fiscal years — slightly better than expected in June 2020 but below potential growth. The bank forecasts a 2pc growth rate for Pakistan next fiscal year (2021-22).

The outlook is predicated on maintaining reform momentum and adherence to a macroeconomic-sustainability framework. “Limited prospects for a strong rebound in the services sector will aggravate poverty” as the sector represents about half of Pakistan’s output and an important source of income for low-income households.

On the other hand, the South Asia region is projected to grow by 3.3pc in 2021.

Weak growth prospects reflect a protracted recovery in incomes and employment, especially in the services sector, limited credit provisioning constrained by financial sector vulnerabilities, and muted fiscal policy support. The forecast assumed that a vaccine will be distributed on a large scale in the region starting from the second half of 2021 and that there is no widespread resurgence in infections.

In India, growth is expected to recover to 5.4pc in 2021, as the rebound from a low base is offset by muted private investment growth given financial sector weaknesses. In the financial sector, non-performing loans were already high before the pandemic.

In the region excluding India, the impact on growth would be slightly smaller; growth would slow to 0.9pc in 2021 (on a calendar year basis) instead of 2.1pc. Afghanistan, Maldives, and Pakistan are likely to see the largest downgrades.

The GEP said Pakistan’s growth was estimated to have contracted by 1.5pc in FY2019-20, reflecting the effects of localised Covid-19 containment measures, as well as the impact of monetary and fiscal tightening prior to the outbreak. It may be noted that the Pakistan government had reported an economic contraction of 0.4pc on the conclusion of the fiscal year ended June 30, 2020.

The WB said 625 basis points cut in Pakistan’s policy rate moved real interest rates into negative territory. The risk of debt distress is elevated in several economies, especially Maldives, Pakistan, and Sri Lanka, with decisive action required to maintain macroeconomic stability.

It said the remittance inflows remained robust in 2020 with double-digit growth in Bangladesh and Pakistan “due to the increased use of formal channels to repatriate funds, government incentives, and the return of migrant workers”. These inflows have contributed to the improvement of current accounts, and in some cases with international assistance, allowed several major regional economies — Pakistan, India and Bangladesh — to increase their foreign reserves.

External vulnerabilities have been some-what mitigated by the uptake of the Debt Service Suspension Initiative (DSSI) in Afghanistan, Maldives, Nepal, and Pakistan from G20 countries. Further policy intervention, however, is needed to minimise the risk of crisis, including greater debt transparency.

The bank warned that some economies including Pakistan also faced considerable policy and security-related uncertainties. The policy space needed to implement long-term growth strategies has been eroded by the impact of the pandemic, and further increases the risk of financial and sovereign debt crises. “Security-related uncertainties could weigh on activity in Afghanistan, India, Nepal, and Pakistan”.

The report said the pandemic caused deep output losses and contributed to a sharp rise in poverty and unemployment in South Asia. In India, the pandemic hit the economy at a time when growth was already decelerating. Output in India was estimated to contract by 9.6pc in FY2020-21, reflecting a sharp drop in household spending and private investment. In the rest of the region, the economic impact of Covid-19 has been somewhat less severe but still significant.

Economies that depend heavily on tourism and travel have been especially hard hit (Maldives, Nepal, Sri Lanka). In Bangladesh, which had been one of the fastest growing emerging market and developing economies prior to the pandemic, growth is estimated to have decelerated to 2pc in 2019-20.

Risks to the regional outlook are tilted to the downside. They include more severe and longer-lasting infection rates from the pandemic, financial and debt distress caused by an abrupt tightening of financing conditions or possible widespread corporate bankruptcies, adverse effects of extreme weather and climate change, weaker-than-expected recoveries in key partner economies, and a worsening of policy- and security-related uncertainty.

Additional stress on domestic banks in the region could be triggered by the economic consequences of a more protracted recovery from the pandemic, which in turn could lead to a rise in bankruptcies and weaken the balance sheets of the banking and non-banking sectors among several economies of the region (Bangladesh, Bhutan, India, Sri Lanka). Extreme weather events also remain an important regional risk.

Published in Dawn, January 6th, 2021

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