Pakistan starts 2019 amid concerns on economic growth and employment

As the year 2018 has ended, many doubts and questions have emerged in the minds of the people regarding how the economy will perform in 2019.

Will 2019 be a good year for Pakistan’s economy or not? As in the previous year, the economy went through with so many economic challenges such as decreasing foreign exchange reserves, increasing trade deficit, circular debt as well as foreign loans, taking a toll on its macroeconomic health.

In 2019, people are hoping that the new government will revive the fading economic and business confidence and minimize the uncertainty for the working classes. The year ahead will dictate the government’s performance and determine how far the new government succeeds in fulfilling its vision and promises it made after it came to power.

Experts believe that measures taken by the government to discourage imports, smuggling, under-invoices and phasing out of black economy will yield a positive result in 2019.

“The issues and challenges in 2019 will be totally different from 2018, the biggest economic issue in 2019 is going to be growth concern and employment”, a senior economic expert Muzammil Aslam said.

Last year the growth was 5.8 percent, SBP reduced it and projected it to 4.3 percent and it is expected to be around 3 percent after Pakistan’s near term expected entry into IMF program. This growth concern will spillover to overall employment level and the reduction in employment level will hit the stability of the government, he further added.

“Initial period of 2019 is going to be a correcting period, after that there will be a recovery period for Pakistan’s Economy, current account deficit is expected to ease off and will be near to $10 to $11 bln in 2019 as compared to $19 bln as things are getting back on track”, a senior economic expert Khurram Shahzad optimistically said.

Following the year end, many global economic forecasters have reviewed down the expected economic performance of Pakistan, quoting shrinking foreign exchange reserves and a high debt burden among other factors. The World Bank (WB), International Monetary Fund (IMF) and the Asian Development Bank (ADB) have brought down the GDP growth forecast by 2 percent to 3 percent. Reputable credit rating agencies Fitch Ratings and Moody’s have downgraded Pakistan to the lower end of the highly speculative grade on the back of heightened external financing risk, elevated foreign debt repayments and as well as deteriorating fiscal position. This will have repercussions for Pakistan as the country struggles to raise capital to bridge funding gaps where the financing cost for raising capital from international market is expected to go up.

The challenges that country is facing in the current political environment demand political stability in the tough phase ahead. The deficit-pierced government will not be able to close the investment gap. The responsibility, therefore, rests directly on private sector to fill up the rising gap. Without local investor mobilization expecting foreign direct investment is unrealistic.

The bottom line, however, is that only significant fresh dosages of investment can ease the economic burden going forward. Moreover, 2019 is expected to be the year for foreign investments in the country as CPEC is going to enter its second phase, shifting its focus from infrastructure to trade and industry.

Besides alleviating risks to the external sector, the dollar injection from China and Saudi Arabia, and promised budgetary support from the UAE, did earn the incumbent government some trust in the well-being of the country.

“2019 is going to be a difficult year for Pakistan, as the dollar inflows into the country from friendly nations will have to be repaid in one year if there are no structural reforms in place, leaving no impact in the long-run” Director Research Intermarket Securities Raza Jafri said.

Furthermore, 1st quarter of the 2019 will be important, as comfort for BOP position will be taken in the near term, he added.

“Inflows from friendly countries are not the permanent solution but a short-term relief. They have given us a time to make our economy better in 2019 through reforms”, member of Economic Council Dr. Ashfaque Hassan said.

Despite foreign inflows from friendly allies, the markets are still not comfortable. IMF deal is highly ‘needed’ by the government because it believes the programme will improve the credibility of the policy evolved to fix the economy and minimize risks in a highly volatile world.

The indecision on the government’s part on whether or not to go to IMF for another bailout plan is likely to keep investor sentiments depressed and an entry to the program may be greeted positively by the market participants. However, the euphoria is unlikely to last long as tough conditions will weigh in on economic growth and dent market sentiments.

“Actions speak louder than words, the rise in interest rate, depreciation of currency, cutting down subsidies and a slowdown in economic growth reflects government’s pre-entry preparations to sign a new IMF program”, Raza Jafri said.

While most of the analysts believe that the IMF program will help the country crawl out of a recurring balance-of-payments crisis in the long run, some economists believe otherwise.

“For the last ten years Pakistan has been into IMF programme and it did nothing but hurt the economy further, so Pakistan should avoid going to IMF in 2019, as the lender of the last resort has imposed a condition to slow down growth to 3 percent, whereas a minimum of 7 percent growth is required for the government to tackle economic challenges”, Dr. Ashfaque hassan said while giving his views on Pakistan’s expected entry into IMF programme in 2019.

In the current year the economy is expected to grow slower than it was in the outgoing year. One can safely assume a decline in income for most household categories. Decline in purchasing power along with lower incomes means a setback for households. It can be seen that, purchasing power is eroding not only because of inflation but also depreciation of PKR. Despite the ongoing interest rate hikes, it is difficult to predict how soon inflation will come under control.

Higher inflation remains a concern and the central bank is fighting inflationary pressures with higher interest rates. It should not be difficult to assume how this will impact an already low level of private-sector investment in 2018-19. In 2017-18 when inflation was below 4 percent, private-sector investment stood at 9.8 percent of GDP while the savings of non-government sector, including the private sector and public-sector enterprises, was equal to just 7.5 percent of GDP.

The interest rate tightening, which is likely to continue to keep inflation in check and meet one of the pre-conditions of a new IMF loan package, means higher financial cost for businesses and lower margins. In contrast, the contraction in demand as a result of higher interest rates will mean further erosion in businesses’ profits.

In an economy where markets are imperfect, transmission of monetary tightening takes longer to control inflation. Keeping these facts in mind, immediate relief in inflation will be hard to achieve.

“There will be no impact of further monetary tightening on inflation as it recently reduced due to decline in oil prices”, Dr. Ashfaque Hassan said.

Slump in crude oil prices in the recent weeks amid supply side adjustments is a major positive for Pakistan economy as it will lower the import bill in coming quarters, if the oil prices remain on the lower side.

“Oil prices are coming down, inflation is coming down, gap between interest rate and inflation which is real interest rate is historic high of more than 3 percent so, unnecessary tightening will choke the economy”, Khurram Shahzad said.

On the other hand, in 2018, business community expressed annoyance at the rapid adjustments in interest rates and PKR. However, in 2019 government is expected to take important steps to facilitate both local and foreign investment and to improve its ease of doing business environment in the country.

With regard to capital market performance, many analysts believe that the market will perform better in 2019 as compared to 2018.

After two years of negative return stock market will likely to close this year at positive return”, Muzammil Aslam said.

Deterioration in balance of payment crises will remake the market in 2019 because of improvement in the availability of liquidity. Moreover, the banking sector and oil companies will be the profit making sectors”, he further added.

Adding to aforementioned view Raza Jafri said that “while there are challenges to the economy, the stock market should turn the corner in 2019 as the bad is already priced in. We see up to 20% returns for the KSE-100 in 2019”.

Since most of the economic indicators are showing positive trend towards economic stabilization but still there are some bitter pills on the way. However, the transformation towards reforms would be encouraging, prosperous and long lasting for Pakistan’s economy.

Copyright Mettis Link News

Posted on: 2019-01-07T13:39:00+05:00