Pakistan’s economy will go through painful readjustments over the next few months as Islamabad will opt for tight monetary and fiscal policies to address economic imbalances, like the trade deficit, budgetary loss and falling rupee that have built up in recent years, Fitch Solutions said in a report released on Tuesday.
The New York-based global research and ratings agency says the government policies will cause the economy to slow down in the coming quarters. This means there will be fewer jobs or even layoffs as business will hold back on their expansion plans and the government will reduce spending on development projects as part of its austerity drive.
The government is faced with daunting economic imbalances with depleting foreign exchange reserves caused by a negative trade balance and a massive fiscal deficit being the biggest challenges. For every dollar earned, the country spends two, leading to a negative balance of payment. As a result, the government’s dollar reserves have been falling, making it difficult for the government to sustain essential imports like oil and machinery. On the local front, it spends more than it earns, leaving it with a loss of over Rs2 trillion a year. This leaves the government little money to spend on its people, thus forcing it to borrow from local banks and international lenders to finance these gaps.
“We at Fitch Solutions maintain our forecast for Pakistan’s real GDP to slow to 4.4% in fiscal year ending June 2019 from 5.4% of FY2018 due to tightening monetary and fiscal conditions,” a Fitch research said.
The ratings agency also said the rising geopolitical tensions [read the ongoing tension between India and Pakistan] and slowing global growth will likely also dampen Pakistan’s economic outlook for the remainder of FY2019.
The picture for the next fiscal year wasn’t rosy either. Economic growth in FY2020 will be even slower at 4.1% because of the negative impact from recovering oil prices, Fitch said, referring to an expected increase in international oil prices, which may outweigh the impact of recent policy measures that helped reduce our trade deficit. Oil is our major import and an increase in its price will not only widen our trade deficit but also cause inflation.
Rising inflation, a widening fiscal deficit and falling foreign exchange reserves will remain some of the key challenges, which require tighter monetary policy. Moreover, a weak currency will result in a loss in purchasing power among consumers. The dollar has already appreciated more than 25% last year against the rupee while inflation was reported to be above 8% in February.
However, a possible deal between Pakistan and the International Monetary Fund (IMF) would be a positive signal and an agreement between the two parties could see growth surprise and more reforms, which will help reduce current imbalances and attract more investment, it said.