The World Bank (WB) has further slashed the Gross Domestic Product (GDP) growth projection for Pakistan to 3.7 percent for the fiscal year 2018-19 from its previous projection of 4.8 percent.
The GDP growth is projected to decelerate to 3.7 percent in the fiscal year 2018-19, with financial conditions tightening to help counter rising inflation and external vulnerabilities.
WB, in its latest report, “Global Economic Prospects, Darkening Skies” states that macroeconomic imbalances weigh on the growth outlook in Pakistan and the country is expected to face financing needs due to large current account and fiscal deficits combined with low international reserves.
The report continues that to some extent in Pakistan, external debt is sizable and current account deficits have deteriorated considerably. Recent currency pressures have eroded Pakistan’s foreign exchange reserves significantly—they currently amount to only around two months of imports.
There were some signs of rising inflation pressure across the region, and both India and Pakistan raised rates in 2018 to counter the effects of currency depreciation, rising energy prices, and domestic capacity constraints.
Price pressures, widening fiscal and current account deficits, or in some cases, currency and financial market volatility have prompted a shift to less accommodative monetary policy in some countries (e.g., India, Mexico, Pakistan, the Philippines, Romania), maintained the report.
Pakistan’s fiscal deficit rose to 6.6 percent of its GDP last year, well above the government’s target of 4.1 percent, as tax collection fell short of expectations.
Activity is slowing and financial conditions have tightened in a number of commodity importers that have experienced financial market stress or continue to face widening fiscal and current account deficits (e.g., Pakistan, the Philippines, and Romania).
Growth is projected to accelerate to 7.1 percent for South Asia in 2019. This mainly reflects strengthening domestic demand in India, as the benefits of structural reforms such as GST harmonization and bank recapitalization take effect. Elsewhere in the region, the forecast is for moderation in activity, notably in Bangladesh and Pakistan.
Excluding India, regional growth moderated slightly in 2018. Pakistan’s GDP (factor cost) is estimated to have grown 5.8 percent in the fiscal year 2017-18, with solid contributions from consumption and investment. Activity was supported by strengthening in the agricultural and industrial sectors and sustained acceleration in services.
The report further states that in Pakistan, the informal sector provides two-thirds of total employment but produces only about one-third of GDP. This difference points to considerably lower informal labor productivity relative to total labor productivity in Pakistan than in Brazil, in part reflecting lower educational attainment of informal workers.
Pakistan raised income taxes on non-corporate partnership firms in 2009. Pakistan’s corporate tax hike was followed by rising informality as firms switched business models and reported lower earning.