ISLAMABAD – World Bank has said that immediate macroeconomic adjustmentsare required for Pakistan to correct the large twin deficits.

World Bank’s latest edition of the South Asia Economic Focus, BudgetCrunch, finds that rising global interest rates and tighter liquiditysituation will pose challenges to Pakistan given the high gross externalfinancing requirements.

With declining reserves and elevated debt ratios, Pakistan’s ability towithstand external shocks is diminished and risks will remain predominantlyon the downside.

Appropriate policy responses to correct these imbalances and increasedbuffers to absorb future shocks will reduce these risks and support apositive growth outlook.

Such responses would entail increased flexibility of the exchange rate,strengthening the fiscal position through renewed efforts to improverevenue collection and better coordination between federal and provincialgovernments to reduce public spending.

Giving future outlook, the WB report said Pakistan’s GDP growth isprojected to decelerate to 4.8 percent in FY19 as authorities are expectedto tighten fiscal policy to correct imbalances.

However, growth is expected to recover in FY20 and reach 5.2 percent asmacroeconomic conditions improve.

This recovery is conditional upon the restoration of macroeconomicstability, a supportive external environment, including relatively stableinternational oil prices, and a strong recovery in exports.

Inflation is expected to rise to 8 percent (average) in FY19 and remainhigh in FY20, driven by exchange rate pass through to domestic prices and amoderate increase in international oil prices.

The pressure on the current account is expected to persist and the tradedeficit is projected to remain elevated during FY19 and FY20. Remittanceswill continue to partly finance the current account deficit, althoughslower growth in the Gulf Cooperation Council (GCC) countries will affectremittances.

FDI, multilateral, bilateral, and private debt-creating flows are expectedto be the main financing sources in the near to medium term.

The fiscal deficit is projected to narrow in FY19 due to post-electionadjustments and some fiscal measures.

It is expected that there will be some scaling down of public investmentspending at the federal and provincial levels, and increase in revenuecollection through tax base expansion and other administrative measures.

Fiscal consolidation would improve debt dynamics, but the public debt toGDP ratio is expected to stay around 70 percent of GDP during FY19 and FY20– the debt burden benchmark for high-risk in case of Emerging Markets (asper the IMF Market-Access Countries public debt sustainability analysis).

Growth deceleration and higher inflation are expected to slow-down povertyreduction in FY19 though overall poverty decline is projected to continuereflecting GDP growth. The presence of safety net programs will mitigatethe negative impact of inflation on poverty. – APP