EIU forecasts annual growth to average 2.9pc in five years

KARACHI: UK-based advisory service Economist Intelligence Unit (EIU) on Wednesday forecast Pakistan’s annual growth at nine-year low of an average 2.9 percent over the next five years, saying the new government’s monetary and fiscal measures would stifle demand.

“We believe that the government’s efforts to address the country’s looming balance-of-payments crisis will have a dampening effect on economic expansion,” the EIU, a part of the Economist Group, said in a country outlook report. “We expect real GDP growth to average 2.9 percent a year in 2018/19-2022/23.”

The EIU said Pakistan is facing an impending balance of payments crisis, with foreign-exchange reserves not even enough to cover two months’ worth of goods and services imports. But, the International Monetary Fund’s (IMF) rescue loan, coupled with lending from other bilateral donors and strong remittance inflows, is likely to stabilise the external sector, it said.

“We expect government controls to slow import growth, particularly in the first half of the forecast period. However, with demand for oil imports being largely inelastic, the expected depreciation in the local currency and an elevated level of oil prices in 2019-23 will lead to a swelling of the oil import bill,” it added.

“Overall, we expect the current account deficit to average the equivalent of 3.7 percent of GDP in 2019-23, compared with the estimated average of 5.4 percent in 2017-18.”

Government is currently negotiating a financial assistance program with the IMF and if successful it would be the 13th loan package from Washington-based lender since 1980.

The EIU said IMF program, expected in mid next year, will prompt the government to significantly cut planned development and social spending, “exerting a drag on GDP growth”.

The government is expected to make gradual progress on privatisation owing to the IMF’s insistence despite strong opposition from entrenched interests within state-owned enterprises.

“Regulatory inefficiencies, complex labour laws and an unreliable security situation will continue to weigh on the business environment, which will remain poor throughout 2019-23,” the EIU said. “We expect growth in both private and government consumption to slow. The introduction of tight government controls on imports will curb investment growth in 2018/19-2020/21, as it becomes harder to import goods into the country, although growth should pick up after 2022 as Pakistan’s IMF programme comes to an end.”

The research and advisory group said robust external demand and the weakening of rupee would boost exports.

“We anticipate further devaluation of the Pakistan rupee and expect the exchange rate to average PRs139.9:US$1 in 2019,” it added. “The local currency is likely to continue on this depreciatory trajectory throughout the forecast period, with the exchange rate expected to average PRs142.4:US$1 in 2020-23.”

The Economist Intelligence Unit expected consumer and producer price inflation to average 8.6 percent and 7.8 percent, respectively in 2019-20, driven in part by the anticipated weakening of the local currency.

“We expect inflationary pressures to also be fuelled by the increase in gas and electricity prices likely to be mandated under the IMF’s rescue plan. This, coupled with the feed-through effect of elevated global oil prices, will push up both consumer and producer prices,” the EIU added.

“We expect the SBP to respond with a sharp tightening of monetary policy in order to counter inflationary pressures, particularly in the first half of the forecast period. Overall, we expect annual consumer price inflation to average 7.3 percent in 2019-23.”