ISLAMABAD                     -                 The international financial institutions (IFIs) have projected that Pakistan debt will witness significant increase in last quarter (April to June) of current fiscal year as country’s new external financing needs are likely to rise by about $2.0 billion following decline in exports and remittances due to coronavirus situation.

The Economic Affairs Division in report ‘Impact of Covid-19 on Pakistan’s economy, from the prospective of International Financial Institutions’ has noted that COVID-19 pandemic will have severe impacts on Pakistan’s economy. The report projected that for the first time since 1950 real GDP growth of Pakistan will be in negative. Pakistan is likely to witness considerable decrease in workers remittances and exports. However, fall in oil prices and weaker import demands provide some support to the current account balance.

“But due to Pakistan’s new external financing needs of about $2.0 billion in the last quarter of FY 2020, IFIs expect that Pakistan debt will witness significant increase. Pakistan’s public debt is assessed to be sustainable, but risks have increased substantially,” the report noted. Depending upon the effective response of Pakistan and international community in combating the pandemic, IFIs reports suggested that in FY2021 there is slight improvement in macroeconomic indicators.

According to the report, as per IMF projection, Pakistan’s real GDP would grow at a pace of -1.5 percent in FY 2020 mainly due to severe contraction in output during the last quarter of the current fiscal year. Pakistan GDP growth will witness a contraction for the first time since 1950. However, in FY 2021 the real GDP would grow at the rate of 2.0 percent.  As per World Bank estimation, real GDP growth of Pakistan will be -1.3% in FY 2020 and 0.9 percent in FY2021.  ADB’s estimation is mainly based on virus outbreak in China and its possible affects on other Asian economies. ADB is of the view that growth in Pakistan will slow as agriculture stagnates, notably affecting cotton output, and as stabilization efforts constrain domestic demand.

IMF foresees inflation will be 11.3 percent in FY 2020 and it would be reduced to 8.0 percent in FY2021. World Bank’s estimated inflation is 11.8 percent and 9.5 percent for FY 2020 and FY 2021 respectively. According to ADB, Pakistan will struggle with double-digit inflation (11.5 percent) in FY 2020 fueled by escalating food prices, scheduled hikes to utility rates, and domestic currency depreciation and it would decline to 8.3 percent in FY 2021.

IMF projected that budget deficit is expected to be -9.2 percent of GDP in FY 2020 due to decline in tax revenue and increase in public spending to support the health response, social safety nets  for the very poor. However, it is expected that in FY 2021 budget deficits will be improved to some extent and would be around 6.2 percent of GDP.

World Bank expects that budget deficit will be-9.5 percent of GDP in FY 2020 and it will gradually decline to -8.7 percent of GDP in FY2021. As per ADB, the fiscal deficit will be 8.0 percent of GDP in FY2020 as the government continues to prioritize consolidation.

IMF is of the view that fall in oil prices and weaker import demand provide some support to the current account but the COVID-19 shock will have a severe impact on the balance of payments especially declined remittances and exports. It will result in new external financing needs of about $2.0 billion in the last quarter of FY 2020. It is envisaged that these urgent external financing needs will be met through the use of Fund credit, fresh resources committed by multilateral partners. These disbursements would maintain central bank reserves at$12.0 billion (2.7 months of imports) by end of FY 2020. The IMF foresee that there would be potential financing gap of around $1.6 billion in FY 2021, which would be filled through the use of reserve assets, additional support from  multilateral partners, and, if needed, additional policy adjustments. According to IMF, Pakistan debt as percentage of GDP would reach to 89.8 percent in FY 2020 and would be slightly reduced to 87.8 percent of GDP in FY 2021. Pakistan’s public debt is assessed to be sustainable, but risks have increased substantially.

World Bank also projected significant decline in workers remittances as well as in exports earning and is of the view that increased multilateral and bilateral flows are expected to be the main financing sources over the medium-term. However, the public debt-to-GDP ratio is expected to increase and with Pakistan’s exposure to debt-related shocks remains high. It has been projected that debt to GDP ratio will reach 90.6 percent in FY2020 and 91.8 percent in FY 2021. Additionally, volatility of oil prices and difficulty in rolling-over of bilateral debt from non-traditional donors (China, KSA and UAE) would compound Pakistan’s external risks and contribute to higher financing gaps.