Current Account Deficit Threatens Pakistan’s Macroeconomic Indicators: WB

Macroeconomic risks in Pakistan have increased substantially during the current fiscal year 2017. Political uncertainty and upcoming elections have made it particularly vulnerable given the persistent current account deficit affecting the country’s payback position.

World Bank issued a report, The South Asia Economic Focus Fall 2017, this report discuss the issues faced by South Asian countries. The report was released ahead of the World Bank and IMF annual meetings.

The report briefly touched upon the political situation of the Pakistan and the ouster of former prime minister Nawaz Sharif.

“The quitting of ex-Prime Minister Nawaz Sharif has enhanced political risks and created some policy uncertainty. The upcoming national elections in 2018 may affect the reforms momentum and macroeconomic policy. Slower progress in much-needed structural reforms would weaken growth prospects and discourage private investment.” said the report.

The report says that Pakistan’s weaker macroeconomic discipline has led to vulnerabilities in the balance of payments. Since the IMF program came to an end, external indicators of the economy have deteriorated.

Discussing Pakistan’s overall economic performance, the report says that a year ago Pakistan was in a comfortable position, as international reserves were large enough to cover the current account deficit, the service of external debts and even the total volume of portfolio investments in the country.

In Pakistan, macroeconomic discipline arguably weakened after the IMF program came to an end. In recent years, there has been clear progress in restoring macroeconomic stability and laying foundations for higher growth. The report says that weaker discipline leads to vulnerabilities in balance of payments.

Pakistan also regained emerging market status in the MSCI index and made progress on the China-Pakistan Economic Corridor (CPEC); two developments that reinforced general optimism.

The report stated, “It is also expected that FDI flows will strengthen due to the accelerated implementation of CPEC projects. However, capital and financial flows during FY2018 and FY2019 will only partly finance the current account deficit, which will result in a drawdown of reserves during these two years.”

According to the report, improving the external balance hinges upon revival of exports, a slowdown in imports, and stable remittance flows. In the absence of any of these factors, the persistent current account deficit will put further pressure on already dwindling reserves.

The fiscal position is also expected to deteriorate during the election cycle, which would affect debt trends and maintain debt at the current high level, cautions the report.

The outlook until fiscal year 2019 is for moderately higher growth, and this outlook is contingent upon continued macro-economic and political stability, as well as steady progress in implementing the main pillars of the government’s medium-term reform program, which tackles key constraints to growth. The outlook assumes that oil prices will increase moderately but remain low.

The report says that fiscal slippages are expected to continue through the election cycle, which will result in a widening of the fiscal deficit during fiscal year 2018. This increase in the fiscal deficit is primarily driven by a slower increase in tax revenues, both federal and provincial, and a sharper increase in expenditures.

An adjustment in the fiscal position in fiscal year 2019 after the election will help in curtailing the fiscal deficit. Inflation, after remaining moderate during fiscal year 2017, is expected to rise in 2018 and 2019. Inflation is expected to rise due to higher domestic demand pressures and a slight increase in international oil prices.