COVID-19 pushes all of Pakistan's positive developments to the side

Research house says economic activity was likely to pick up in FY20 and onwards


Salman Siddiqui April 05, 2020
WHO urges South Asian rivals and Indonesia to increase testing ratio to 10 tests for each positive diagnosis. PHOTO: REUTERS/FILE

KARACHI: Pakistan’s foreign currency reserves are estimated to deplete by another $3 billion to $8 billion while the currency may depreciate to Rs170 against the US dollar by June 30, according to a leading local research house.

Pakistan central bank is expected to keep the benchmark interest rate unchanged at 11% till December 2020, while the government is likely to renegotiate loan programme with the International Monetary Fund (IMF).

“The interest rates were expected to come down, the (rupee/dollar) exchange rate was anticipated to remain stable, economic activity was likely to pick up (in FY20 and onwards); but almost all that have been pushed aside by the outbreak of COVID-19,” Topline Research said in a report titled ‘COVID-19 - An event with unprecedented parallels’ Businessmen have extensively been demanding the State Bank of Pakistan (SBP) to cut the rate to a single digit. Earlier, it revised down the rate by 225 basis points to 11% in the second half of the March.

Pakistan agreed to the latest IMF programme worth $6 billion in May 2019 and has received around $1.5 billion so far. “We expect industries to be operating at 40% efficiency by Jun-2020, at 70% by September 2020 and 85% by December 2020; resulting in an average production loss of 35-40% in nine-month of FY20,” it estimated.

“In FY20, we expect agriculture growth to clock in at 1.2% year-on-year (hampered by 20% year-on-year lower cotton production), industrial growth at minus 7% year-on-year (12% year-on-year lower Large Scale Manufacturing) and services growth at 2.2% year-on-year,” it said.

“It will result in Pakistan reporting 0.0-0.5% year-on-year GDP growth in FY20, wherein the worst-case scenario Pakistan’s economy can shrink by 0.5-1.0% YoY, which will possibly be the first time in Pakistan’s 72-year history. However, in FY21 we expect GDP growth to recover to 3.5%.”

The worsening health crisis and announcement of relief packages by the government have spiked its expenditures and partial closure of businesses has badly hit income.

“Pakistan’s fiscal deficit (the gap between high expenditure and low income) could shoot to 9% of GDP in FY20E and subsequently clock in at 8% of GDP in FY21F.”

Before COVID-19, the year 2020 was expected to be a ‘year of economic resurgence’ after almost three years of economic turbulence, it added.

Pakistan imposed lockdown in the third week of March, which has been extended till April 14, 2020, and “can be further extended,” the research house said.

It is anticipated that the balance of payments problems over the next 3-12 months (even though current account balance will be more than manageable) if Pakistan is unable to muster reasonable support of the IMF, multilateral agencies and friendly countries.

“We believe Pakistan will renegotiate IMF loan programme due to the extraordinary circumstance because of the COVID-19 outbreak,” Topline report said.

As a result of the balance of payments issues, “we have revised our rupee/US dollar assumption for June-2020 to Rs170 (from Rs158) and for June 2021 to Rs180 (from Rs165).”

“Falling commodities prices will help in easing inflation to 11.1% in FY20E and 8.2% in FY21F. Considering the fiscal situation and falling rupee, we have not assumed further policy rate cut in 2020,” it said.

“We believe the overall impact on the economy due to the COVID-19 will be felt across the corporate sector, in one way or the other.” However, there may be a varying level of impact. “We lower our earnings growth estimate (for listed companies) for 2020 from 16% to negative 3% in Dec-2020.”

Most of the projections for the balance of payments, at the start of the year, included the issuance of Eurobonds/Panda bonds ($2-3 billion), privatisation of RLNG power plants ($1.5-2.5 billion) and increase in foreign investment in T-bills ($1-2 billion).

“However, because of the outbreak of COVID-19, the global outlook has significantly deteriorated and almost all of the above are unlikely to be materialised shortly.”

Pakistan has already seen an outflow of almost $2 billion under foreign investment in T-Bills during the last couple of months, along with around $150 million net outflows from the stock market.

The government has approached the IMF for financial assistance under the Fund’s Rapid Financing Instrument (RFI), where media reports highlight assistance of $1.4 billion. The World Bank is also expected to give $200 million to Pakistan under emergency aid.

“Pakistan is also looking forward to reschedule debt repayments with multilateral agencies and at the same also seeking further financing of $3-4 billion,” it said.

“We expect SBP reserves to fall to $8 billion by Jun-2020, if none of the (foreign) support materialises, as debt repayments over the next three months stand at around $4 billion.”

The research house was previously expecting exports of goods to clock in at around $26 billion in FY20, which “we believe is likely to reach around $22.3 billion - resulting in a loss of $3.7 billion during March-June 2020.”

“We now expect remittances to clock in at $20.9 billion and $20.5 billion in FY20 and FY21, respectively (versus an earlier estimate of $22.7 billion and $23.1 billion),” it said.

Published in The Express Tribune, April 5th, 2020.

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