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FY2020: New Fiscal Year to come with old anomalies

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July 3, 2019 (MLN): While the new fiscal year might have commenced on a better-than-expected note, there still remains a lot of apprehension and curiosity as to what FY20 will have in store for the economy of Pakistan.  

That being said, it would be fair to assume that this year will be no less than a carnival carousal, for the country will have to face numerous economic and financial challenges and rectify all the inconsistent decisions made by the current government (in short, start from square one). Sigh!

Talking about the macro situation of the country, the real GDP growth is likely to slow-down to 2.4%, from an expected 3.3% in FY19, considering the impact of high inflation, fiscal consolidation, as well as monetary tightening on the country’s economic doings.

The inflation will certainly reach a double-digit value, with EFG Hermes suggesting a figure of 12.1% as against 7.32% in FY19. This unreasonable surge will most likely be caused by upcoming utility price hikes, persistent rupee devaluation, as well as fiscal measures announced in the Budget 2020.

The aforementioned prospects will result in a chain of reaction, as State Bank of Pakistan will try to control the surge in inflation by pushing the policy rate up by around 100-200 bps.

In spite of a year-long attempt by Central bank to curb the problem of growing Current Account Deficit (CAD), it seems that all these efforts have gone in vain as CAD still remains high as ever and so does the reserve burn ratio. While country might witness a contraction in CAD in FY20, the overall figure will still be very high.   

A strong argument to back the above mentioned statement is that despite strong inflow of remittances in the outgoing fiscal year, the contraction in non-oil imports was not enough to control CAD, as the country saw another poor export performance. Keeping this trend in view, it would be fair to say that a sharp reduction in non-oil imports in the current fiscal year will have no impact on the overall deficit whatsoever.  

With regards to foreign exchange rate, the report suggests a likely figure of PKR 170-180 against US Dollar after taking into account all the aforesaid glitches. However, the $6 billion loan package from International Monetary Fund will greatly help in stabilizing the PKR/USD exchange rate.

Besides external challenges, the country would also be facing some fiscal challenges, thanks to the extremely unrealistic and impractical targets set by government as part of the Budget 2020. But here’s the thing, no matter how aggressive the targets may seem for now, the truth of the matter is that this is the only way government can repair the fiscal imbalances of the economy, as it is left with almost no other choice.

Realistically speaking, the government will manage to raise around 70-80% of the set targets, while the rest shall be compensated by spending cuts.

The local equity markets might have recovered a bit for now, but this improvement shall not last longer keeping in view the pace of economic expansion, which is being severely hindered by lower demand and tighter monetary policies. In brief, the stock markets would be in for a highly volatile roller-coaster ride in FY20.

In a nutshell, this year is on the track to be one of the most difficult, both economically and financially, that the country will be observing.

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Posted on: 2019-07-03T13:36:00+05:00