World Bank lowers Pak growth rate at 2.4% in FY20 on tight monetary policy

The World Bank has lowered Pakistan's growth rate projections for the current fiscal year and next two years owing to continuation of tight monetary policy and fiscal consolidation coupled with external factors.

In its latest report "2020 Global Economic Prospects" released on Wednesday, the global lender forecast Pakistan's current year growth rate at 2.4 per cent -- about 0.3 per cent lower than its estimates of June 2019 -- before touching 3 per cent next fiscal year and 3.9 per cent in fiscal year 2022, according to a report in Dawn news.

"Pakistan's growth is expected to rise to 3 per cent in the next fiscal year after bottoming out at 2.4 per cent in FY2019-20, which ends June 30," the World Bank said, adding that macroeconomic adjustment in the country including a continuation of tight monetary policy and fiscal consolidation is expected to continue.

The lower growth rate forecast is generally in line with a similar (0.2 per cent) decline in global growth rate during the current year and 1.5 per cent decline in the South Asian region.

While growth in Bangladesh is projected to remain above 7 per cent through the forecast horizon, "growth in Pakistan is projected to languish at 3 per cent or less through 2020 as macroeconomic stabilisation efforts weigh on activity".

The bank said the growth had decelerated in the country to an estimated 3.3 per cent in FY2018-19, reflecting a broad-based weakening in domestic demand.

"Significant depreciation of the Pakistani rupee (the nominal effective exchange rate depreciated about 20 per cent over the past year) resulted in inflationary pressures. Monetary policy tightening in response to elevated inflation restricted access to credit. The government retrenched, curtailing public investment, to deal with large twin deficits and low international reserves," it said.

Also progress in fiscal consolidation has broadly weakened. Pakistan's budget deficit rose more sharply than expected. Contributing factors were a shortfall in revenue collection, combined with a sizable increase in interest payments.

The regional outlook for 2020 has deteriorated recently, and risks are tilted to the downside. Financial sector weakness will likely weigh on activity unless balance sheet vulnerabilities are addressed. Although recent tensions between India and Pakistan have abated, a reescalation would damage confidence and weigh on investment in the region.

For countries with elevated debt levels and large current account deficits like Pakistan and Sri Lanka, an unexpected tightening in global financing conditions could sharply raise borrowing costs and lead to stops in capital inflows.

Growth in the region is expected to rise to 5.5 per cent in 2020, assuming a modest rebound in domestic demand and as economic activity benefits from policy accommodation in India and Sri Lanka and improved business confidence and support from infrastructure investments in Afghanistan, Bangladesh, and Pakistan, reported Dawn.

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