Fitch said in its report that the higher taxes will erode the purchasing power which in turn would slowdown consumption growth to 5.3 per cent in 2019-20, down from 6.3 per cent in 2017-18.
“Given our expectations for continued upside pressure on consumer prices over the coming months, we believe that the consumers’ purchasing power will continue to fall over the coming months, thereby weighing on consumption.”
Fitch Solutions, an arm of Fitch Rating Agency, said it would curtail the economic growth, thus leading to revise the GDP targets for the fiscal years 2018-19 and 2019-20 t o 3.2 per cent and 2.7 per cent, respectively, Dunya News reported.
Inflation has been on the rise in Pakistan, increasing by 9.1 percent on a yearly basis in May, as compared to 4.2 per cent in the previous year.
Fitch Solutions has also predicted government spending will be down to 6.4 per cent in 2019-20 from 14.2 per cent in 20-17-18 thanks to an austerity drive.
“IMF bailout packages typically require countries to undergo fiscal consolidation, which usually include the IMF have agreed on focusing on tax-based measures to manage the fiscal deficit, according to media reports, we believe that the Pakistani government will fall short of its ambitious revenue targets and will likely have to cut spending to meet the primary deficit target of 0.6% of GDP,” the report adds.
Moreover, the report sees little improvement in Pakistan’s net exports, as despite the government’s efforts to increase export competitiveness, a global slowdown will likely weigh on exports over the coming months.
“Our view is for global growth to slow from 3.2 per cent in 2018 to 2.9 per cent by 2020, with growth in two of the largest main export destinations, the US and China, slowing to 2.0 per cent and 6.1 per cent respectively by 2020, from 2.9 per cent and 6.6 per cent in 2018. Moreover, we believe that imports could increase over the coming months acting as a slight drag on growth.”
Given that Pakistan’s main imports are petroleum and its products (around 28% of total imports), rising oil prices will likely weigh on net exports.
Fitch’s Oil and Gas team forecasts Brent Crude oil prices to average $70/barrel in 2019 and $76/barrel in 2020, from a year-to-date average of $66.15/ barrel.
In addition to this, the impact of rising oil prices on imports will be exacerbated by a weakening currency.
Following the agreement with the IMF, the Pakistani rupee has been devalued by more than 10 per cent to around Rs157/US dollar (at the time of writing) from around Rs142 before the agreement took place in May.
Meanwhile, Fitch has also predicted decrease in investment, as business sentiment will likely remain subdued in Pakistan, leading to slower investment growth.
“With a slowdown of manufacturing activity, we expect to see a fall in investment appetite related to LSM industries, such as investment in capital goods,” said Fitch Solutions.