- Te World Bank’s gloomy picture
The World Bank Group recently launched its flagship report, Global Economic Prospects [GEP] 2020: Slow Growth, Policy Challenges in which expected global economic performance in the current year is discussed. Straightaway the Report highlights that trade and investment are expected to rebound after a sluggish 2019, which could result in a slight increase in growth rate for 2020 to reach 2.5 percent, as against ‘the post-crisis low of 2.4 percent registered last year’.
At the same time, the Report indicated that this pickup in global growth is expected to come from a recovery in ‘a small number of large EMDEs [emerging market and developing economies], most of which are emerging from deep recessions or sharp slowdowns.’ In order to come out of this recession, the Report recommends that ‘in an environment of limited macroeconomic policy space compounded by high debt levels, EMDEs need to foster inclusive and sustainable growth by undertaking reforms to bolster governance and business climates, improve tax policy, promote trade integration, and rekindle productivity growth, while protecting vulnerable groups.’
Having said that, the Report expects that only a small number of countries among EMDEs will recover, and that ‘about a third of EMDEs are expected to decelerate.’ Moreover, even though a small number of countries among this group are expected to regain some growth momentum, nonetheless, it will not be enough to have any significant consequences for denting poverty levels in EMDEs, since according to the Report ‘per capita income growth in EMDEs will remain insufficient to meet poverty alleviation goals.’ Furthermore, the growth in per capita income is expected to be slowest in Sub-Saharan Africa.
GEP 2020 points out that for EMDEs to grow, it is important for them to focus on enhancing productivity, and continuing with structural reforms. With regard to these two goals, the Report recommends ‘encouraging diversification and upgrading to high-value-added, technology-intensive industries is a pressing priority, and integration in supply chains could also boost productivity and help to counterweigh the effects of weak global trade. Measures to improve governance and business climates and phase out price controls can make institutional environments more conducive to growth. Lastly, tax policy reforms are needed to broaden the revenue base to fund growth-enhancing and climate-friendly investment to support inclusive and sustainable growth.’
Global Economic Prospects Report 2020 indicates that in the case of Pakistan, the real GDP growth rate follows a U-curve, whereby from an expected 3.3 percent in FY2019 (where FY stands for fiscal year, and means FY2018/19), it is forecast to drop to 2.4 percent in FY2020, after which it is expected to increase to 3 percent and 3.9 percent in FY2021 and FY2022, respectively. This is indeed modest when compared with the South Asian region at 4.9 percent (FY2019 expected), 5.5 percent (FY2020 forecast), 5.9 percent (FY2021 forecast), and 6 percent (FY2022 forecast). Moreover, the expected and forecasted growth rate for Pakistan is not at all enough to create needed jobs in the country, or dent poverty in any significant way.
The Report highlights that ‘Inflation has been mostly stable in the region on the back of weak domestic demand and broadly stable currency markets, with the notable exception of Pakistan… 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.’ With regard to outlook, GEP 2020 points out that ‘Regional economic activity is expected to benefit from policy accommodation (India, Sri Lanka), improvement in business confidence and support from infrastructure investments (Afghanistan, Bangladesh, Pakistan)’
That is why the Report recommends focusing on both structural reforms and policies that enhance productivity, so that an appropriate impetus could be provided to the economy from both aggregate demand and supply side policies; a message for overall EMDEs, that is totally applicable to Pakistan. On the other hand, the best performing economy in the South Asian region stands out to be Bangladesh. Here, during FY2020-22, forecast average real GDP growth rate is at 7.3 percent, which is more than the average for the region at 5.8 percent for the same time period. Indeed, there are lessons for Pakistan to take from the policies Bangladesh is pursuing, especially with regard to its export-promotion policies.
The Report highlights that slowdown in economic growth in Pakistan owes to reasons including, ‘[a] monetary tightening, and [b] demand faltered amid credit tightening, reflecting structurally high non-performing assets.’ Moreover, GEP 2020 points out that ‘in Pakistan, growth decelerated to an estimated 3.3 percent 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 percent over the past year) resulted in inflationary pressures (SBP 2019). 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.’
With regard to inflation and the budget deficit in Pakistan, the Report highlights that ‘Inflation has been mostly stable in the region on the back of weak domestic demand and broadly stable currency markets, with the notable exception of Pakistan… 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.’ With regard to outlook, GEP 2020 points out that ‘Regional economic activity is expected to benefit from policy accommodation (India, Sri Lanka), improvement in business confidence and support from infrastructure investments (Afghanistan, Bangladesh, Pakistan).’
With regard to possible risks, the Report highlights that ‘[a] although recent tensions between India and Pakistan have abated, a re-escalation would damage confidence and weigh on investment in the region… [b] Lack of progress in reforms to improve tax collection could result in more acute revenue shortfalls (Bangladesh, Sri Lanka) and put further pressure on elevated fiscal deficits (Pakistan…)… [and c] For countries with elevated debt levels and large current account deficits (…Pakistan, Sri Lanka), an unexpected tightening in global financing conditions could sharply raise borrowing costs and lead to stops in capital inflows (Sengupta and Gupta 2015).’