April 20, 2020 (MLN): With the approval of $1.38 billion under the Rapid Financing Instrument to address the economic impact of the COVID-19 shock, the International Monetary Fund’s (IMF) Executive Board in its staff report has said that the near-term outlook of Pakistan is deteriorating sharply.
In view of unprecedented health and economic shocks from the rapid propagation of the COVID-19 outbreak, the fund has swiftly put in place measures to contain the impact of the shock and support economic activity by increasing public health spending and strengthening social support which are crucial in this time to mitigate the impact of COVID-19 shock on a vulnerable population.
Besides, the Fund has trimmed down all its macroeconomic forecasts for the next three years including reducing GDP growth and tax collection target, plummeting exports, remittances, investment and manufacturing, increase in the budget deficit and rising debt burden.
The report projected that during high uncertainty, Pakistan’s economy will be impacted through external and domestic channels. Externally, the economy would be impacted by a global downturn including in Pakistan’s major export markets such as China, EU and US which would reduce demand for Pakistan’s exports and lead to more limited financial flows.
Domestically, the impact of containment measures together with heightened uncertainty and a generalized loss of confidence by business and consumers are likely to result in concurrent demand and supply shocks feeding off each other, with severe effects on investment and output, the report underscored.
According to the new estimates that IMF has projected after taking in to account higher than usual uncertainty due to COVID-19 pandemic, the Real GDP is projected to decline by –1.5 percent in FY 2020 as a result of a severe contraction in output during the last quarter of the fiscal year.
Growth is expected to remain tepid in H1 FY 2021, depending on the success of efforts to contain the spread of the pandemic in Pakistan and worldwide, and to return gradually to faster growth in the second half of the FY in line with the expected global recovery. “Cumulatively, real GDP growth has been revised down by 5 percentage points over FY 2020–21.” the report said.
The report further stated that manufacturing, especially textiles, transportation, and services are expected to be the sectors more severely impacted, moreover, private sector credit is likely to weaken further due to the heightened uncertainty.
On the external front, the shock has given rise to an urgent balance of payments (BoP) need, while the fall in oil prices and weaker import demand provide some support to the current account balance as it is projected to deteriorate to 1.7% of GDP compared to Pre-Covid-19 estimates of 2.2% of GDP. Nevertheless, the Covid-19 shock will have a severe impact on the BoP, as export growth is likely to come to a halt due to the fall in external demand. It is projected to decline by 4.6% in FY20 against the previous estimates of 7.2% surge. Meanwhile, remittances are expected to drop by over US$5 billion during FY 2020 and FY 2021 as activity in GCC countries declines; and outflows from non-resident holdings of domestic treasuries could continue, despite having experienced $2.0 billion in outflows so far, the report predicted.
“This scenario will result in new financing needs of about US$2.0 billion (0.8 percent of GDP; SDR 1,400 million) in Q4 FY 2020. It is envisaged that these urgent external financing needs will be met through the use of Fund credit under the RFI and fresh resources of around US$250 million committed by multilateral partners, “the report highlighted.
These disbursements would maintain SBP reserves at USD12.0 billion (2.7 months of imports) by end-FY 2020, a level similar to that prior to the shock. Moreover, a potential financing gap of around $1.6 billion could emerge in FY 2021, which would be filled through the use of reserve assets, additional support from multilateral partners, and, if needed, additional policy adjustments, the report added.
On the fiscal side, the report stated that the public debt is assessed to be sustainable, but risks have increased as the Covid-19 shock will, unfortunately, reverse the decline in public debt in recent months on the back of the authorities’ fiscal consolidation efforts. Instead, debt is projected to increase to around 90 percent of GDP in FY 2020, against 85 percent prior to the shock, both due to the sharp decline in growth and the increase in the budget deficit.
In case if the impact of Covid-19 is more severe than projected or the authorities would fail to return to the path of consolidation, this may put fiscal sustainability at risk, the report said.
Copyright Mettis Link News
34301
