The March 27 attack in the Punjab capital of Lahore is a major blow to the government's hitherto progress in the fight against domestic terrorism. While terrorist activity remains on downtrend, the latest attack will be a blow to the county's overall business environment as the government seeks to attract foreign investment amid its somewhat stalled economic reform and privatisation drive.
With the help of reduced oil import costs and increased remittances, Pakistan is seeing an increase in its savings rate, supporting an increase in investment. The textile and automotive sectors appear set to be the main beneficiaries of these trends, although the recent Lahore terror attacks pose a risk to business confidence.
While we continue to see slight weakness in the Pakistani rupee over the course of 2016, this weakness will likely be very minor compared with prior years. The sharp decline in global crude oil prices has substantially improved the outlook for the trade balance, while the country's security situation has continued to improve. Our end-FY2015/16 target is PKR107.00/USD, while our end-FY2016/17 target is PKR109.67/USD.
Pakistan's balance of payments continue to benefit from low oil prices, which have allowed non-oil imports to surge and should be supportive of economic growth. Meanwhile, the relatively strong performance of textile exports is an early sign of the positive impact of the increased availability of energy in the country.
The SBP is likely to maintain its policy rate at 6.00% as inflationary pressures rise over the coming month, before beginning its hiking cycle in fiscal year 2016/17. Supply side reforms, however, will prevent inflationary pressures from rising rapidly over the coming years.
Despite the progress made in terms of narrowing the fiscal deficit, the Pakistani government has thus far failed to get the privatisation drive off the ground. A successful privatisation of Pakistan International Airways would provide fresh impetus to the government's reform drive, which despite impressive progress in recent years, has begun to flag.
Major Forecast Changes
We have not made any significant revisions to our forecasts for Pakistan's economy, but have written a new 10-year forecast article looking at several domestic and external factors that could see the economy break out of its low-savings, low-income equilibrium over the coming years.
With the recent terrorist attack in the Punjab capital of Lahore, security concerns are once again heighted, and there is a risk that the progress made over the past year in terms of fighting terrorism could prove transitory.
The Pakistani economy faces a sweet spot of being very exposed to global energy prices yet relatively shielded from global growth weakness, suggesting there is upside potential for growth from the ongoing decline in oil import costs.
|Real GDP growth, % y-o-y||4.0||4.2||4.3||4.2|
|Nominal GDP, USDbn||235.0||254.7||266.9||287.3|
|Consumer price inflation, % y-o-y, eop||8.2||3.2||5.5||6.0|
|Exchange rate PKR/USD, eop||100.52||104.73||107.87||111.11|
|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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