October 8, 2020 (MLN): Pakistan’s economic growth is projected to remain below potential, at 0.5 percent for FY21 compared to over 4 percent annual average in the three years to FY2019, says the World Bank in its  biannual flagship report “The South Asia Economic Focus”, released today.

This projection, which is highly uncertain, is predicated on the absence of significant infection flare ups or subsequent waves that would require further widespread lockdowns, the report said.

Since the COVID-19 pandemic is not yet under control in South Asia and despite early containment measures, the crisis brought South Asia to a near standstill. In case of Pakistan which has also been severely affected by measures taken to curtail the pandemic, World Bank sees a rise in poverty.

“The economic contraction is likely to have a significant impact on poverty,” says World Bank.

The Lockdown measures have deeply affected non-farm sectors that provide livelihoods to the most vulnerable segments of the population, particularly in urban areas. With government estimates of pandemic job losses at approximately 14 million, poverty is expected to increase for the first time in two decades, it added.

Given anemic growth projections, the report projected that poverty is expected to be worsen in near term as the vulnerable households rely heavily on jobs in the services sector, and the projected weak services growth is likely to be insufficient to reverse the higher poverty rates precipitated by the pandemic.

As per the estimates put forward in the document, the services sector is estimated to have contracted, by over 1 percent, while industrial production is expected to have declined even more, due to the high policy rates prior to the pandemic and plunging domestic and global demand thereafter. The agriculture sector, partially insulated from the effects of containment measures, is estimated to have expanded modestly over the year.

On external front, the current account deficit is expected to widen to an average of 1.5 percent of GDP over FY21-22, with imports and exports gradually picking up as domestic demand and global conditions improve. In FY20, the current account deficit shrunk to 1.1 percent of GDP compared to 4.8 percent of GDP in FY19, mainly due to fall in imports by 19.3 percent.

In addition to that, an exchange rate depreciation in 2019 in Pakistan (which raised import costs) led to effective import compression even before COVID-19 and the effect is forecasted to continue throughout 2020. Furthermore, more favorable terms of trade due to lower commodity prices, as well as higher than earlier expected temporary remittance inflows in mid-2020 for Pakistan lead to a more favorable outlook for the current account.

“Once the recovery of demand leads to import growth, there will be an inflection point as the current account balance deteriorates, depending on the speed of recovery of export demand,” the report said.

With regards to remittances, the report estimates that it may plunge by 8.8% in 2020 and is expected to witness a slight decline in 2021, as the returning migrants have trouble finding employment abroad, which will reduce the current account further. The report also cautioned that there will be a 11.1% decline in remittances in 2020 if the international crisis worsens.

On the other hand, the fiscal deficit is projected to narrow to 7.4 percent in FY22, with the resumption of fiscal consolidation and stronger revenues driven by recovering economic activity and critical structural reforms. The expense side of the government will remain substantial due to sizeable interest payments, a rising salary and pension bill, and absorption of energy SOE guaranteed debt by the government, the report highlighted.

Overall, the economic growth in Pakistan is expected to gradually recover but remain muted, given heightened uncertainty and the resumption of demand compression measures.  However, a possible resurgence of the infection, triggering a new wave of global or domestic lockdowns and further delaying the implementation of critical structural reforms are the major downside risks to the above outlook. Moreover, locust attacks and heavy monsoon rains could lead to widespread crop damage, food insecurity and inflationary pressures, and livelihoods for households dependent primarily on agriculture could also be negatively impacted, the report concluded.

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