Asian Development Bank Projects Slower Growth & Higher Inflation for Pakistan

Pakistan's GDP growth rate is expected to slow down further to 2.8 percent and inflation is expected to rise to 12.0 percent.

This was stated in the Asian Development Bank's latest report titled Asian Development Outlook 2020, arguing that the growth in Pakistan in FY2019 (ended 30 June 2019) fell to 3.3%, reflecting lower investment amid persistent macroeconomic imbalances. Pakistan's growth projection is lowered to 2.8% for FY2020, but a 3-year program of stabilization and structural reform with the International Monetary Fund since July 2019 promises to help address large macroeconomic imbalances.

However, it noted that agriculture is expected to recover from weather-induced contraction this year, with major incentives in the government's agriculture support package included in the budget for FY2020.

The inflation is projected to increase with anticipation of planned tariff hikes for domestic utilities, higher taxes, and especially the lagged impact of currency depreciation. It may be noted that the 2.8 percent GDP growth for Pakistan is the lowest in South Asia while 12 percent inflation is the highest among the bloc of eight nations.

The report stated that sizable currency depreciation accelerated inflation but helped substantially narrow the current account deficit. Overall growth is expected to slow further in FY2020 as the authorities implement a comprehensive program of fiscal consolidation and monetary tightening to stabilize the economy and address structural weaknesses.

As per the report, the provisional estimates have shown that GDP growth slowed down from 5.5% in FY2018 to 3.3% in FY2019, below the ADO 2019 forecast of 3.9%.

The report further highlighted that on the supply side, all sectors contributed substantially less to GDP growth than a year earlier. On the demand side, private consumption, accounting for 82% of GDP, contributed 3.1 percentage points to growth despite higher inflation and borrowing costs.

In the updated assessments, the report notes that the Pakistan rupee had depreciated against the US dollar by 24% in FY2019 as the authorities moved toward the adoption of a flexible exchange rate determined by the market, after having defended an overvalued rupee in recent years.

Inflation was also higher at 7.3 percent as compared to FY2018 at 3.9 percent. The report stated that rising inflation was mainly reflecting currency depreciation and a considerable increase in domestic fuel prices.

The report further stated that the deficit in the general government budget, which consolidates federal and provincial accounts, markedly surpassed a large deficit equal to 6.5% of GDP in FY2018 to reach 8.9% in FY2019. Revenue declined significantly from the equivalent of 15.1% of GDP to 12.7%.

However, the current account deficit eased from 6.3% of GDP in FY2018 to 4.8% in FY2019. The trade deficit

narrowed by almost 11.5% to $28.2 billion as rupee depreciation drove down merchandise imports by 7.4%, particularly for goods other than petroleum.

Prospects

Addressing the prospects for the country, the ADO said:

To restore macroeconomic stability, the government plans to catalyse significant international financial support and promote sustainable and balanced growth under a 3-year economic stabilization and reform program with the International Monetary Fund (IMF). Fiscal consolidation under the programme aims to reduce the large public debt while expanding social spending, establish a flexible exchange rate regime to restore competitiveness, and rebuild official reserves.

The fiscal adjustments are expected to suppress domestic demand and demand contraction will keep growth in manufacturing subdued. However, it found that agriculture was expected to recover with the assistance of the government's agriculture support package.

Inflation

ADB state that the inflation, which remained elevated at the start of FY2020 at 9.4% in July and August. It is projected to accelerate further to average 12.0% in FY2020 because of a planned hike in domestic utility prices, taxes introduced in the FY2020 budget and the lagged impact of currency depreciation.

Pressure from inflationary expectations can be relieved by the government's commitment to refrain from directly financing the budget deficit by borrowing from the central bank as monetary policy continues to tighten.

IMF Package

The economic reform program supported by the IMF envisages a multiyear strategy for revenue mobilization to pare public debt to a sustainable level. The budget assumes tax revenue increased to equal 14.3pc of GDP. With non-tax revenue projected at 2.3pc of GDP in FY2020, total revenue is expected to increase to 16.6pc of GDP.

The expenditure in FY2020 is projected to equal 23.8 percent of GDP while the budget deficit in FY2020 is expected to equate to 7.2 percent of GDP.

To strengthen fiscal discipline, the government has recently adopted the Public Financial Management Act in the context of the FY2020 finance bill.

The budget deficit in FY2020 is expected to equal 7.2% of GDP�still large but 1.7 percentage point lower than the FY2018 outcome.

Trade Deficit

The report found that the trade deficit had shrunk by nearly half in the first half of July, from $3.4 billion a year earlier to $1.8 billion.

With the further narrowing of the trade deficit and a continued positive trend in workers' remittances, the current account deficit is projected to narrow further to 2.8pc of GDP in FY2020. Import payments will remain subdued, reflecting weak economic activity and the pass-through of past rupee depreciation against US dollar.

The real effective exchange rate is now thought to be near equilibrium, and a lower and more stable rupee is expected to improve export competitiveness.

Foreign Capital Inflows

The foreign capital inflows are expected to increase, stated the report.

Foreign direct investment should revive as investors' confidence is restored with the implementation of the IMF stabilization and reform program.

This should also help bring additional finance from multilateral institutions and other international partners, the report stated, adding that the activation of a Saudi oil facility with a potential disbursement in the current fiscal year, was expected to raise foreign exchange reserves to over $10 billion by the end of FY2020.

Source: Pro Pakistani