–WB says informal sector provides two-thirds of total employment, but produces only around one-third of GDP
–Forecasts global economic economy will decelerate to 2.9pc this year, 2.8pc in 2020
The World Bank (WB) has projected that Pakistan’s economic growth will decelerate to 3.7% in the ongoing fiscal year with financial conditions tightening to help counter rising inflation and external vulnerabilities from a 13-year high of 5.8 per cent in FY17-18.
The Washington-based lender, in a semi-annual report released Tuesday, stated that macroeconomic imbalance are weighing on the country’s growth outlook and it is expected to face financing needs due to large twin deficits (current account and trade deficit) combined with low international reserves.
Activity is projected to rebound and average 4.6 percent over the medium term with support from stabilising macroeconomic conditions, said the report.
During FY17-18, WB estimated that Pakistan’s economy grew at 5.8 per cent with solid contributions from consumption and investment.
Moreover, activity was backed by the strengthening in the agricultural and industrial sectors as well as sustained acceleration in services.
The report named “Global Economic Prospects Darkening Skies” stated the growth in South Asia is expected to accelerate to 7.1% in 2019 on the back of strengthening consumption and robust consumption.
According to WB, import restrictions and tariff increases were also imposed by emerging market and developing economies (EMDEs) as retaliatory actions or actions focused at decreasing current account vulnerabilities in the face of intensifying capital outflow pressures which included Pakistan, Iran, Sri Lanka, Turkey and Egypt.
It noted price pressures, widening fiscal and current account deficits and in some cases, currency and financial market turmoil caused a move to less accommodative monetary policy in countries, including Pakistan, Romania, India, Mexico and the Philippines.
Additionally, the moderation in activity was most obvious among commodity importers with growing capacity constraint, high current account deficits or sizable public debt.
Citing the example of Pakistan, the Philippines and Romania, the WB report stated these markets were experiencing financial market stress or continue to face widening fiscal and current account deficits alongside a slowdown in economic activity.
“There were some signs of rising inflation pressure across the region, and both Pakistan and India raised rates in 2018 to counter the effects of currency depreciation, rising energy prices, and domestic capacity constraints,” the report highlighted.
In Pakistan, the informal sector provides two-thirds of total employment but produces only about one-third of GDP, said WB.
“The informal sector accounts for about 70 per cent of employment and 30 per cent of GDP in emerging market and developing economies.”
Since it is associated with lower productivity and tax revenues and greater poverty and inequality, this is symptomatic of opportunities lost, the report stated further.
“Reducing tax and regulatory burdens, improving access to finance, offering better education and public services, and strengthening public revenue frameworks could level the playing field between formal and informal sectors,” said WB.
Notably, WB forecast a moderation in activity for Pakistan and Bangladesh and over the medium-term growth is expected to remain at 7.1 per cent in the region supported by robust domestic demand.
“External vulnerabilities are rising, reflected in mounting external debt, widening current account deficits, and eroding foreign reserves. Risks to the outlook are to the downside,” said the report.
According to the WB, the global economic economy is expected to slow to 2.9 per cent this year, and 2.8 per cent in 2020, slightly below the previous forecast.
Additionally, estimates for nearly all regions and countries were downgraded and it warned the seething trade wars could constrain the global economy.