TAHIR AMIN

ISLAMABAD: World Bank (WB) has projected GDP growth for Pakistan to reach 5.8 percent in fiscal year 2018, but warned that macroeconomic imbalances are widening as macroeconomic and political risks have increased.

The WB report tilted “South Asia Economic Focus, jobless growth?,” states balance of payments position is particularly vulnerable at the current level of reserves. Upcoming elections may delay decisive policy adjustment, such as increased exchange rate flexibility and fiscal consolidation, until after the elections.

The report states that macroeconomic stability is a major concern for the near-term economic outlook. Several short-term measures are required to correct external and domestic imbalances, which must be complemented with implementation of medium term reforms.

In the medium-term, the government needs to put considerable effort in reforming its tax system and tackle competitiveness challenges. A strategy based on lowering the cost of doing business and improving productivity would be critical for higher and sustainable export growth.

Supported by infrastructure projects of the China Pakistan Economic Corridor (CPEC), improved energy supply, and persistent private consumption growth, GDP growth is projected to reach 5.8 percent in fiscal year 2018. This growth estimate is based on actual data from the first eight months of this fiscal year. GDP growth is expected to moderate to 5.0 percent in 2019 reflecting tighter policies to unwind vulnerabilities accumulated over the past years.

After the election, expected policy adjustments to correct for macroeconomic imbalances are projected to lead to a slowdown in growth in fiscal year 2019, driven by a contraction in domestic consumption and investment. However, growth is expected to recover in fiscal year 2020 and reach 5.4 percent. This recovery is contingent upon restoring and preserving macroeconomic stability, as well as steady progress in implementing reforms which tackle key growth constraints.

The outlook assumes that oil prices will increase moderately but remain low, and that political and security risks will be managed. The pressure on the current account is expected to persist as the trade deficit is projected to remain at an elevated level during fiscal year 2019.

The report states increased exchange rate flexibility should support exports and imports are expected to slow down in fiscal year 2019. Remittances will continue to partly finance the current account deficit; nonetheless, slower growth in GCC countries will affect migrants’ employment options and growth in remittances.

Foreign Direct Investment (FDI), multilateral, bilateral, and private debt-creating flows are expected to be the main financing sources in the medium-term. To meet external financing needs, the government will continue to access international markets. Fiscal deficits are projected to narrow in fiscal year 2019 as authorities adjust macroeconomic policies. The adjustment will come initially on the back of scaling down in investment spending both at the federal and provincial level. However, bolstering of revenues as a result of expanding the tax base and other administrative measures will support fiscal consolidation.

Inflation is expected to rise in fiscal year 2019 and remain high in fiscal year 2020. The increase in prices will be driven by exchange rate pass through to domestic prices and a moderate increase in international oil prices.

Tax revenues of Federal Board of Revenue (FBR) during Jul-Jan fiscal year 2018 stood at Rs 1.992 billion compared to Rs1.696 billion in the same period last year – 17.5 percent year-on-year growth. The public debt to GDP ratio deteriorated to 65.7 percent of GDP by end of the first half of fiscal year 2018 compared to 64.5 percent of GDP at end of the first half of fiscal year 2017.

The correlation between global trends and stock market developments in Pakistan is weaker. The Karachi Stock Exchange 100 Index (KSE 100 Index) was on a downward trend until the devaluations of December 2017 and March 2018 pushed stock market prices up again. This downward trend had started around May 2017, after a period of exuberance that reflected an expected upgrade to the MSCI Emerging Market Index and greater confidence on macroeconomic stability. The declining trend was reverted after the Pakistan rupee depreciated by 5 percent in December, which prompted the KSE 100 Index to jump by around 5000 points.

Pakistan raised its interest rate slightly at the end of January to pre-empt an overheating of the economy and to react to slowly but steadily increasing core inflation. In Pakistan, the monthly trade deficit reached $2.3 billion.

In December 2017, the State Bank of Pakistan allowed the currency to depreciate against the USD. The Pakistani rupee fell from around 105 per USD to more than 110.5. A subsequent devaluation in March 2018 took the exchange rate to around 115.6 rupees per USD.

In Pakistan, the fiscal position has deteriorated rapidly. The deficit reached 5.8 percent of GDP in 2017, which is 2 percentage points higher than the initial target and more than 1 percentage point higher than in the previous year.

The WB maintained that every month, the working age population increases by 250,000 people and Pakistan must create 1.4 million jobs a year to maintain its employment rate. Bangladesh has created between 90 and 120 thousand jobs per percentage point of GDP growth, and Pakistan between 310 and 410 thousand.

In Pakistan, structural changes in employment have been the most muted. Across countries, construction is the only sector that employed a bigger share of the working-age population in 2015 than in 2005. In Pakistan, the share of public sector employment in the working-age population declined by around 0.5 percentage points between 2005 and 2015.

In Bangladesh, 1.1 million new jobs would be required every year, in Pakistan 1.3 million, and in India over 8 million. The growth rates needed to achieve such remarkable job creation would be between 6 and 11 percent. These growth rates are high and all above current performance. But conceivably they can be attained if there is a concerted effort to boost economic performance.

This edition, Jobless Growth?, argues that growth alone will not be enough to attain the higher employment rates enjoyed by other developing countries, especially among women. “More than 1.8 million young people will reach working age every month in South Asia through 2025 and the good news is that economic growth is creating jobs in the region,” said Martin Rama, World Bank South Asia Region Chief Economist. “But providing opportunities to these young entrants while attracting more women into the labor market, will require generating even more jobs for every point of economic growth.”