Pakistan is expected to bounce back with modest growth during the current fiscal year but a widening deficit and growing debt still pose risks to its economic outlook.
“We expect Pakistan to experience modest growth in FY2020/21 following a small contraction in FY2019/20,” the Institute of International Finance has said in its latest report.
“However, risks to the economic outlook are tilted to the downside. Recurrent outbreaks of Covid-19, a large fiscal deficit and high public indebtedness remain major challenges.”
The Washington-based global association of financial institutions said the economy could grow by 1.8% in FY2020/21, driven by some recovery in private consumption.
The country’s exchange rate is market-determined and has depreciated by 22% in real effective terms since 2017.
“The effects of currency depreciation and weaker domestic demand are visible, as imports dropped by 18% in nominal dollar terms, more than offsetting the decline in exports of 7% in FY2020,” the institute said in the report, “Pakistan: Commitment to Reform Faces a Test”.
The pandemic led to a contraction in output of 0.7% in FY2020.
Domestic demand declined 2%, while exports of goods and services increased 1.6% as compared with a decline of 7.3% in imports of goods and services.
Adjusted for population, fewer cases and deaths of Covid-19 have been recorded in Pakistan than in other developing and emerging economies. These results are subject to a large degree of uncertainty, as data quality, testing capacity, and transparency vary.
The IIF said lockdown restrictions have been lifted across the country. The response measures have been adequate, supported by the IMF’s emergency financing thourgh an amount of $1.4 billion, provided in April.
Expansion of social programs has rightly focused on tackling the health emergency and supporting the most vulnerable while stimulating economic activity, the report argued.
The State Bank of Pakistan’s proactive liquidity initiatives and lower policy rates are propping up economic activity and safeguarding financial stability, according to the IIF.
The policy rate has been lowered five times since February, a cumulative reduction of 625 basis points.
The authorities have also introduced a fiscal stimulus package in the amount of $5.1 billion, which included direct transfers to wage workers and poor families, financial support to SMEs and the agricultural sector, higher subsidies for basic goods, and various tax incentives.