Pakistan’s economy in fiscal year (FY) 2019, which ended on 30 June, is showing signs of recovery as the government’s fiscal consolidation and austerity measures to address the structural weaknesses started to take effect. However, the growth rate moderated to 3.3% during the period, reflecting persistent macroeconomic imbalances and heightened external challenges, according to the Asian Development Outlook (ADO) Update 2019.
The update of the Asian Development Bank’s (ADB) flagship annual economic publication notes the current account deficit eased from 6.3% of gross domestic product (GDP) in FY2018 to 4.8% in FY2019. The trade deficit narrowed by almost 11.5% to $28.2 billion as rupee depreciation drove down merchandise imports by 7.4%, particularly for goods other than petroleum. Despite currency depreciation in real effective terms, merchandise exports declined by 2.2%, partly because low cotton production constrained textile exports. Workers’ remittances stirred from 3 years of near stagnation to grow by 9.7%, lending support to the current account.
“Pakistan has done well in stabilizing the economy in the face of strong challenges by taming the spiraling current account deficits and through robust implementation of reforms to improve governance and rejuvenating country’s competitiveness,” said ADB Country Director for Pakistan Ms. Xiaohong Yang. “Pakistan needs to press ahead with macroeconomic and structural reforms; revitalizing public sector enterprises; improving revenue collection, energy, and water security; and leveraging improved security and regional cooperation opportunities to secure the hard-won gains and promote growth.”
The financial account surplus narrowed considerably in FY2019 by 16.2%. The $2.3 billion fall was mostly accounted for by $1.8 billion less in foreign direct investment owing in part to policy uncertainty but also to the winding down of energy and infrastructure projects in the People’s Republic of China (PRC)–Pakistan Economic Corridor. However, notwithstanding large bilateral financing received from the PRC, Saudi Arabia, and the United Arab Emirates, gross foreign exchange reserves fell by $2.5 billion to $7.3 billion at the end of June 2019, or cover for 1.7 months of imports.
Other notable challenges included a 24% depreciation of Pakistani rupees against the US dollar in FY2019 as the authorities moved toward the adoption of a flexible exchange rate determined by the market, after having defended an overvalued rupee in recent years. Inflation trended substantially higher, from an average of 3.9% in FY2018 to 7.3% in FY2019, mainly reflecting currency depreciation and a considerable increase in domestic fuel prices. Average food inflation reached 4.6%, partly because of the poor harvest, and nonfood inflation accelerated to 9.2%. To keep policy rate positive in real terms, the State Bank of Pakistan, the country’s central bank, raised its policy rate by a cumulative 575 basis points to 12.25% at the end of FY2019, and by another 100 basis points to 13.25% in July 2019.
On the supply side, all sectors contributed substantially less to GDP growth than a year earlier. Growth in agriculture decelerated from 3.9% to 0.8% as water shortages meant smaller harvests of major crops. Industry growth fell markedly from 4.9% to 1.4% as demand weakened. Large-scale manufacturing reversed 5.1% expansion to fall by 2.1%, with contraction almost across the board, while construction dropped by 7.6%. Exceptional 40.5% growth in electricity production was registered as new generation projects reached completion, which fully accounted for industry growth. With marked weakening in agriculture and industry, growth in services slowed from 6.2% to 4.7%.
On the demand side, private consumption, accounting for 82% of GDP, contributed 3.1 percentage points to growth despite higher inflation and borrowing costs. Public consumption, edging up to the equivalent of 12% of GDP, contributed 1.0 percentage point. Meanwhile, contraction in gross fixed investment trimmed growth by 1.3 percentage points, mostly reflecting significantly reduced public investment as the government cut development spending.
“Pakistan needs to continue efforts to stabilize and protect the economy against external risks, rising global prices, rising debt servicing, and continued losses of public sector enterprise,” said Ms. Yang.
The report notes that to restore macroeconomic stability, the government plans to catalyze significant international financial support and promote sustainable and balanced growth under a 3-year economic stabilization and reform program with the International Monetary Fund (IMF). Fiscal consolidation under the program aims to reduce the large public debt while expanding social spending, establishing a flexible exchange rate regime to restore competitiveness, and rebuilding official reserves. The IMF economic reform program envisages a multiyear strategy for revenue mobilization to pare public debt to a sustainable level. The budget assumes tax revenue increased to equal 14.3% of GDP. With non-tax revenue projected at 2.3% of GDP in FY2020, total revenue is expected to increase to 16.6% of GDP.
Given the need for the authorities to address sizable fiscal and external imbalances, the economy is expected to slow further, with GDP growth projected at 2.8% in FY2020. Fiscal adjustments are expected to suppress domestic demand, and demand contraction will keep growth in manufacturing subdued. However, agriculture is expected to recover from weather-induced contraction this year, with major incentives in the government’s agriculture support package included in the budget for FY2020.
COVID-19 crisis highlights widening regional disparities in healthcare and the economy
The impact of the COVID-19 crisis on people and economies has highlighted widening regional disparities in access to healthcare and economic growth and persistent disparities in digitalisation over the past decade, according to a new OECD report.
Regions and Cities at a Glance 2020 says that at the onset of the pandemic, some regions were less well prepared to face the health emergency. With 10 beds for every 1000 inhabitants, regions close to metropolitan areas have almost twice as many beds as remote regions. Over the last decades, most regions in OECD countries have seen a significant reduction in the number of hospital beds available per inhabitant, with an average decline of 6% since 2000 and of 22% in remote areas.
The health impact of COVID-19 has been particularly hard in some areas within countries. For example, in some regions of Colombia, Italy and Spain, the number of deaths between February and June 2020 was at least 50% higher than the average over the same period in the 2 previous years.
Morbidity rates that make some places more vulnerable to health crises than others also vary widely. In some regions in Mexico, Chile and the United States, close to 40% or more of the population is obese, posing a higher risk in terms of fatal diseases. For example, due to higher obesity levels, in Mississippi the average likelihood to suffer severe symptoms if infected with COVID-19 is roughly 23% higher than in Colorado.
People living in large cities and capitals were also more able to quickly shift to remote working. Many rural areas still suffer from a lack of access to high-speed broadband, a lower share of jobs amenable to remote working and a less well-educated workforce. One in three households in rural areas does not have access to high-speed broadband, on average. Overall, only 7 out of 26 countries have succeeded in ensuring access to high-speed connection to more than 80% of households in rural regions. And in some regions in Italy, Portugal and Turkey, 25% or more of the population does not use the Internet or does not have a computer.
Some regions were also struggling economically before the crisis. After a period of decline in the early 2000s, gaps in GDP per capita across small regions in the OECD area have increased, reflecting a long-standing process of concentration of population and economic activities in metropolitan areas.
The evolution of regional economic disparities remains very heterogeneous across countries. Contrary to the OECD-wide trend, one-half of OECD countries experienced an increase in the gap between their richest and poorest regions. Trends in regional productivity follow similar patterns. Since 2008, only one-third of OECD countries have experienced an increase in productivity in all regions.
With more than 100 indicators, Regions and Cities at a Glance 2020 combines official statistics with new, modelled indicators based on less conventional data sources, analysing trends in health, well-being, economic growth, employment and the environment, as well as regions and cities’ preparedness to face global crises and adapt to megatrends.
Cash flow the biggest problem facing business during COVID-19 crisis
A new report on the impact of the COVID-19 pandemic on businesses shows that their greatest challenges have been insufficient cash flow to maintain staff and operations, supplier disruptions and access to raw materials.
With businesses already undergoing significant competitive pressure prior to the crisis, government restrictions, health challenges and the economic fall-out brought by COVID-19 further set back many enterprises.
Interrupted cash flow was the greatest problem, the survey found. More than 85 per cent reported the pandemic had a high or medium financial impact on their operations. Only a third said they had sufficient funding for recovery. Micro and small enterprises (those with 99 employees or fewer) were worst affected.
The survey, carried out by Employers and Business Membership Organizations (EBMOs), involved more than 4,500 enterprises in 45 countries worldwide. EBMOs gathered data from their enterprise members between March and June 2020. The businesses were asked about operational continuity, financial health, and their workforce.
At that time, 78 per cent of those surveyed reported that they had changed their operations to protect them from COVID-19, but three-quarters were able to continue operating in some form despite measures arising from government restrictions. Eighty-five per cent had already implemented measures to protect staff from the virus.
Nearly 80 per cent said they planned to retain their staff – larger companies were more likely to say this. However, around a quarter reported that they anticipated losing more than 40 per cent of their staff.
Looking into the future, preparing for unforeseen circumstances and mitigating risks associated with a disruption of business operations is needed. Fewer than half the enterprises surveyed had a business continuity plan (BCP) when the pandemic hit, with micro and small businesses the least likely to have made such preparations. Additionally, only 26 per cent of the enterprises who responded said they were fully insured and 54 per cent had no coverage at all. Medium-sized enterprises, (those with 100 to 250 employees), were most likely to have full or partial coverage.
Strengthening government support measures for enterprises are also vital for their recovery. Four out of ten enterprises said they had no funding to support business recovery while two-thirds said funding was insufficient. Of the sectors analysed, the tourism and hospitality sector, followed by retail and sales, were most likely to report funding issues.
The report production was facilitated by EBMOs who collected and shared the survey data with the Bureau for Employers’ Activities (ACT/EMP) at the International Labour Organization. ACT/EMP is a specialized unit within the ILO Secretariat that maintains close and direct relations with employers’ constituents.
Lithuania: COVID-19 crisis reinforces the need for reforms to drive growth and reduce inequality
Effective containment measures, a well-functioning health system and swift public support to firms and households have helped Lithuania to weather the COVID-19 crisis to date. That said, the pandemic still carries significant economic risks, and the recent upsurge in infections is very concerning. Once a recovery is under way, Lithuania should aim to reform public companies, strengthen public finances, and ensure that growth benefits all people and regions, according to a new OECD report.
The OECD’s latest Economic Survey of Lithuania says that prior to COVID-19, good economic management and an investment-friendly business climate were helping to lift average Lithuanian incomes closer to advanced country levels. While the recession provoked by the virus has been milder than elsewhere – with GDP projected to drop by 2% in 2020 before rebounding by 2.7% in 2021 – Lithuania’s small and open economy will be vulnerable to any prolonged disruption to world trade. Increasing public investment and improving governance at state-owned enterprises could help lift growth and productivity. Other reforms should focus on improving the effectiveness of spending and taxation. Over the longer term, Lithuania should establish a clear debt reduction path and a long-term debt target.
“Lithuania’s sound economic management of recent years, and its swift response to both the health and economic aspects of the pandemic, are helping the country to weather the COVID-19 crisis,” said OECD Secretary-General Angel Gurría. “It is now key to build on these achievements and restart the reform engine to ensure robust, sustainable and inclusive growth for the future.”
The pandemic has exposed high levels of income inequality in Lithuania, where relative poverty is high among the unemployed, the less educated, single parents and older people due to a tax-benefit system that is insufficiently redistributive. The Survey recommends Lithuania to continue providing temporary support to people and businesses hit by COVID-19, as well as to increase regular social support while retaining incentives to work.
In terms of support to the economy, the Survey notes that while Lithuania’s government spending has increased considerably over the past two years, it remains below the OECD average. Public investment also remains low. Given the importance of modernising infrastructure and stimulating crisis-hit demand, the Survey recommends maintaining or increasing current levels of investment and improving investment quality by carrying out rigorous cost-benefit analysis for individual projects. Increasing investment in rural areas, and giving local government more say in tax policy and spending, could help reduce regional disparities and promote inclusive growth.
The Survey also recommends phasing out environmentally damaging fossil fuel subsidies and increasing environmental taxation, which would benefit public finances while helping the shift to a lower-carbon economy.
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