ISLAMABAD -Pakistan economy to face a big setback due coronavirus pandemiceconomic crisis.
Following the pandemic, JP Morgan expects Pakistan’s economy to contractby 1.4% this year, after growing 3.3% last year.
Pakistan’s economy is expected to recover its GDP growth by a modest 2.4percent in the next financial year of 2020-21 after economic shocks fromthe pandemic that pushed the country toward recession, said JP Morgan.
Prior to the outbreak, we had penciled in a weak but still positive growthat 2.1% in FY20-21. We now believe that the economy will contract by 1.4%in the fiscal year ending in June, with risks skewed on the downside.
The authorities expect the economy to contract by 1.6%. We believe that thebounce-back will be gradual and expect 2.4% growth in 20/21 (down from 3.2%in the previous forecast). This will be the first contraction in theeconomy on record.
The pandemic has pushed the economy to recession together with the rest ofthe world. In response, the authorities have unveiled stimulus measures tosupport activity including sharp policy rate cuts.
The report highlighted the government’s response to combat the economicslowdown in the country.
Authorities have put in place significant monetary and fiscal measures tocounteract the negative economic impact of the pandemic. The federalgovernment approved a stimulus package of Rs. 1.2 trillion (about 3% ofGDP) and earmarked another Rs. 200 billion to help workers.
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The government also introduced an additional Rs. 75 billion relief packagefor workers this week. SBP introduced a number of funds to provideliquidity, to facilitate the import of medical instruments and drugs andslashed interest rates by a cumulative 425 bps in just a month.
SBP first lowered policy rates by 75 bps in its scheduled march meeting anda further 150 bps and 200 bps in two emergency meetings, bringing the keypolicy rate from 13.25% to 9.0%. The sharp monetary easing came despite thepressure on the rupee which lost 8% of its value against the dollar inMarch amidst foreign portfolio investment outflows (Exhibit 3) whichlowered international reserves by $2 billion
Multilateral lenders have played a key role to support sentiment. IMFapproved the disbursement of $1.4 billion (0.5% of GDP) to Pakistan underthe Rapid Financing Instrument (RFI) on April 16th, to help the country inaddressing the challenges related to COVID-19.
However, the $6 billion EFF program review was put on hold. The secondreview of the EFF, which would have potentially given the green light tothe $0.5 billion disbursements, was supposed to happen in April. Followingthe COVID-19 crisis, JP Morgan believes performance criteria and indicativetargets under the EFF were unlikely to be met and the program parameterswill likely need substantial revision
The shutdown is expected to sharply weaken the fiscal position of thecountry. The fiscal targets under the EFF program had already been tooambitious, we note, and we now see the deficit widening to almost 10% ofGDP.
Despite a likely decline in remittances, JP Morgan expects the currentaccount deficit to remain low supported by lower oil prices.
