ISLAMABAD: Deviation of the fiscal deficit from the target indicates the difficulty faced by federal government in running a credible fiscal policy if provincial governments are not legally bound to contribute to such a target, said World Bank’s ‘Pakistan Development Update’ issued on Monday.

If this issue is not resolved, prudent fiscal policy will not be possible, and Pakistan will be exposed to another cycle of fiscal slippages. Simultaneously, the government needs to tackle other structural fiscal issues.

The report titled ‘At a Crossroad’, warned that with diminished reserves and elevated debt ratios, Pakistan’s ability to withstand external shocks has weakened significantly.

Pakistan’s ability to raise funds from the global markets has been impacted by rising US treasury yields, and challenges faced by Turkey and Argentina which would squeeze liquidity from the emerging markets.

The report says that the policy adjustments are needed to correct macroeconomic imbalances which are likely to decelerate GDP growth to 4.8 per cent during the current fiscal year as authorities tighten fiscal policy and adjust policy levers to correct the imbalances.

The report suggests that GDP growth is expected to recover by FY2020 to 5.2pc as macroeconomic conditions improve. These projections depend on macroeconomic stability and supportive external environment, including relatively stable international oil prices and a strong recovery in exports.

The subsequent contraction in domestic demand is likely to decelerate growth in the services sector to 5.1pc, agriculture sector to 3.5pc and industrial sector to 5pc during the current fiscal year.

The widening twin deficits have increased the public debt-to-GDP ratio to 73.5pc, the highest ever since 2003. One-third of this increase is attributable to the depreciation of rupee against US dollar.

The new regulatory duties are likely to impact the volume of imports, while also affecting inflation and the country’s export competitiveness.

In addition to these short-term adjustments, Pakistan must implement a medium-term reform agenda to avoid finding itself in the same situation five years from now.

The report highlights that Pakistan’s macroeconomic challenges are structural worsened by poor policy choices and a weak external environment.

The structural challenges are related to low investment rates and the difficulty Pakistan has in increasing investment sustainably, given inadequate financing options: limited fiscal space for public investment, low saving rates and limited FDI for private investment.

In addition, Pakistan’s exports are at the risk of being thwarted by a no-deal ‘Brexit’ situation since UK is Pakistan’s largest trading partners. However, the report also mentioned that Pakistan could take advantage of US-China tensions if multinationals opt to relocate production facilities away from China to avoid tariffs.

On the export front, Pakistan’s performance during the last decade highlights economy’s declining competitiveness in the world particular compared to the countries in the region. High customs duties shelter Pakistani firms from competition, discouraging them from venturing into export markets.

Published in Dawn, October 10th, 2018