While the Pakistan government has had some success in reducing the number of terrorist attacks over the past 18 months, progress on addressing its root causes under the National Action Plan has been much less promising. Aside from the still-considerable potential for terrorist attacks, the lack of free speech and the growing use of blasphemy laws will make it difficult for the country to attract foreign investment.
We forecast the Pakistani economy to grow by 4.2% in FY2016/17, after an estimated growth rate of 4.7% in FY2015/16. Strong growth momentum and an expansionary budget will be supportive factors, but the rise in global oil prices will remove a major growth tailwind.
We are revising up our forecast for the Pakistani rupee, now expecting the SBP to maintain the current peg at roughly PKR104.7/USD, where it has been for most the year, rather than allow slight weakness. A combination of booming remittances and still-favourable terms of trade should keep dollar inflows strong, while increased financial account inflows should help to allow the central bank to build up reserves without the need to weaken the currency.
The 25bps cut in the benchmark interest rate in May will likely mark the last in the cycle, with near term inflation pressures rising. The next move will likely be a hike, which we expect to come in the latter part of 2016, but we do not expect a major hiking cycle as structural inflationary pressures will remain benign.
Pakistan's entry into the MSCI Emerging Markets Index will provide a significant boost to the country's portfolio account inflows over the coming years and highlights the progress made under the IMF-led reforms since 2013. However, continued reforms will be needed to ensure the country maintains its Emerging Market status and takes full advantage of the impending inflows.
Major Forecast Changes
We have made two changes to our Pakistan economic forecasts this quarter. Firstly, we are now pencilling in one rate hike by the SBP following their shock decision to cut the benchmark interest rate by 25bps in May. Indeed, it is likely that the SBP will look to reverse course as price pressures build over the coming months.
Secondly, we are now forecasting the currency to remain at the current level of PKR104.70/USD as the central bank has the willingness and ability to maintain the current peg over the coming fiscal year.
The risks to our real GDP growth forecast are tilted to the upside. The Pakistani economy faces a sweet spot of being very exposed to global energy prices yet relatively shielded from global growth weakness, and there are incipient signs that improved fiscal management and energy availability are driving a recovery in the crucial manufacturing sector.
|Real GDP growth, % y-o-y||4.0||4.2||4.7||4.2|
|Nominal GDP, USDbn||235.0||254.7||267.9||293.5|
|Consumer price inflation, % y-o-y, eop||8.2||3.2||5.5||6.0|
|Exchange rate PKR/USD, eop||100.52||104.73||104.70||106.79|
|Budget balance, % of GDP||-5.5||-5.3||-4.8||-4.4|
|Current account balance, % of GDP||-1.3||-1.0||1.2||1.0|
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