ISLAMABAD: The World Bank said on Sunday the country’s economic growth rate was expected to decelerate further to 2.7 per cent — the lowest in South Asia — in the next financial year owing to the prevailing tight fiscal and monetary policies.

“Pakistan’s economic growth will decelerate to 3.4pc in fiscal year 2019 and 2.7pc in fiscal year 2020, as fiscal and monetary policies are tightened to address macroeconomic imbalances,” the Washington-based lending agency said in its latest edition of the South Asia Economic Focus report, a biannual update presenting recent economic developments and a near-term economic outlook for the region.

The report says the domestic demand is expected to contract while at the same time export growth will be gradual. On the supply side, services growth, which has been leading growth in the past, is projected to decline to 4.4pc in FY19 compared to 6.4pc in FY18.

The two key economic sectors — agriculture and industry sectors — will also grow significantly lower in FY19 and FY20.

Services sector projected to decline to 4.4pc; significant slowdown forecast for agriculture and industry; low growth attributed to tight fiscal and monetary policies

The bank says the economic growth is expected to recover to 4pc in FY21 (2020-21) as structural reforms take effect and macroeconomic conditions improve. The flow of remittances is likely to support the current account balance next year. A more stable external environment is expected to also support a pickup in economic activity starting from FY21.

Pakistan’s trade deficit is projected to remain high during FY19, but to narrow in FY20 and FY21 as the impact of currency depreciation, domestic demand compression, and other regulatory measures to curb imports set in.

“Pakistan’s growth must be driven by investment and productivity, which will put an end to the boom and bust cycles that affect the country every few years,” says Illango Patchamuthu, World Bank Country Director for Pakistan.

The report says it is possible for Pakistan to transform its regulatory environment and reduce the cost of doing business while the reforms to improve tax administration and widen the tax base are critical on the revenue front. It says the actions outlined in the recently announced Ehsaas programme can protect the poor through social safety nets and safeguarding public spending on health and education over the adjustment period and beyond.

According to the report, macroeconomic imbalances, reflected in large fiscal and current account deficits, are expected to resolve gradually. Remittances flows are likely to support growth and the current account balance next year. A relatively more stable external environment is seen as helping a pickup in economic activity starting from FY2020/21.

Other countries

According to the report, Afghanistan will be the only country in the eight-member South Asia region to stay behind Pakistan with 2.5pc growth rate this year, compared to Pakistan’s 3.4pc expected increase in GDP growth rate. India is forecast to lead the region with a constant 7.5pc growth rate during the current year through 2021, closely followed by Bangladesh with 7.3pc current year, 7.4pc next year and 7.3pc in 2021.

Nepal is expected to maintain its third position at 6pc this year, to be followed by 6.1pc and 6.2pc over the next two years in that order. Bhutan and Maldives are forecast to remain on fourth and fifth positions in the region with growth rates ranging between 5.2pc and 5.7pc by 2021.

Yet, South Asia holds on to its top spot as the world’s fastest growing region, with its average growth set to step up to 7pc in 2019, then 7.1pc in 2020 and 2021. But the region needs to increase its exports to sustain its high growth and reach its full economic potential, says the World Bank report.

Across South Asia, imports grew much stronger than exports in the last two years, reversing the region’s export dynamics of the early 2000s.

Strong domestic demand, fuelled by a consumption and investment boom, resulted in high import growth of 14.9pc in 2017 and 15.6pc in 2018 – nearly twice as high as the region’s export growth. In comparison, exports grew by only 4.6pc in 2017 and 9.7pc in 2018.

“There’s no single solution that can unleash South Asia’s export potential and policymakers need to implement an ambitious range of reforms that can turn the region into the world’s next export powerhouse,” says Hans Timmer, World Bank’s Chief Economist for the South Asia region. “Efforts should include trade liberalisation, spurring entrepreneurship, and equipping citizens with the skills they need to compete on the global market. It would be good to be creative and relentless in all these efforts”.

The report says the region’s growth, while still robust, is mainly driven by domestic demand, which in turn swells imports and far outstrips exports, further widening trade gaps and current account deficits, and triggering currency depreciation in some countries.

“South Asia’s export performance has dropped in the last few years to languish at far below its potential and while growth still looks robust we are concerned about whether this can hold up over the longer term,” says Hartwig Schafer, World Bank Vice President for the region.

“To ensure growth in the long run, the region needs to integrate further into international markets to sustain its upward growth trajectory, create more jobs, and boost prosperity for its people.”

The report offers a positive outlook based on recent months as export growth was picking up from its low levels, even outpacing import growth, in the third and fourth quarter of 2018. This recent acceleration of export growth, combined with a slowdown in import growth, is expected to continue in 2019 and beyond, with both rates eventually converging on an average 11pc growth rate.

But despite this recent progress, South Asian countries still export only one-third of their potential and the gap is widening. The report estimates that the region’s export gap has widened over time, standing at over 20pc of GDP in 2017, as South Asia has not fully taken advantage of a favourable international trade environment and remains on the margins of global value chains.

Published in Dawn, April 8th, 2019