Pakistan's growth to slow to 4.4%, external woes set to continue: Fitch Solutions

January 7, 2019 (MLN): Fitch Solutions Macro Research, a unit of Fitch Group but an independent research house in its ‘Outlook for Pakistan’s economy’, maintains its forecast for Pakistan’s real GDP growth to slow to 4.4% in FY2018/19 and 4.1% in FY2019/20, from 5.4% in the previous fiscal year, despite the windfall from the decline in oil prices.

“This will likely be triggered by a non-oil import crunch, which in our view, is looking increasingly likely over the coming months. The growing prospects of an impending global trade slowdown is likely to weigh on Pakistan’s exports,” opines the research house.

Pakistan’s external accounts continue to deteriorate despite the steep drop in oil prices, and with exports likely to come under pressure amid a global trade slowdown, Fitch Solutions believes that a considerable non-oil import contraction is looking increasingly likely.

“This will likely adversely impact Pakistan’s economic growth over the coming quarters, which informs our decision to maintain the country’s real GDP growth forecast at 4.4% for FY2018/19 (July – June) and 4 .1% in FY20 19 /20 (from 5.4% in FY20 17/18 ), despite the windfall from oil import savings”.

The key question is whether the fall in oil import prices will be enough to balance the trade account in the absence of a sharp drop in non-oil imports that would otherwise cause severe economic dislocation. “Prior economic crises for Pakistan have been triggered by a sharp reduction in imports following large external deficits, and although a likely agreement with the IMF over the coming months will prevent an outright balance of payments crisis, we believe that Pakistan’s external woes are not yet over,” says Fitch.

Moreover, the research house sees little prospect of an export rebound. It says that, “Despite exports nearing all-time highs in rupee terms, exports contracted by 12.8% y-o-y in November in dollar terms, and we see little prospect of a pick up any time soon in the context of a global trade slowdown. The US is Pakistan’s main export market and the recent equity rout is pointing towards an impending slowdown in the US economy.”

Meanwhile, China, Pakistan’s second largest export market, faces continued risks from the ongoing trade war with the US, despite a recent commitment to open up its import market. “Should exports continue their decline, we could see total imports fall another 20 -30% from here after already falling 20% from their peak in dollar terms,” they added.

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