ADB projects decline in GDP, as trade deficit continues to worsen

Pakistan must address fiscal challenges, revive exports to sustain growth: ADB report

ISLAMABAD: According to a new Asian Development Bank (ADB) report, Pakistan’s economy is projected to maintain strong growth in fiscal year (FY) 2018 as the power supply situation in the country improves, manufacturing and crop harvests strengthen, and consumption expenditure and investments rise.

In its new report, titled, Asian Development Outlook (ADO) 2018, ADB projects gross domestic product (GDP) growth for Pakistan at 5.6 per cent in FY2018 and 5.1 per cent in FY2019 as fiscal challenges and wider current account deficits take effect. ADO is ADB’s flagship annual economic publication.

“Pakistan’s economic prospects in the coming years remain positive if the budget and current account deficits are reduced, and exports are rejuvenated by improving the country’s competitiveness,” said ADB Country Director for Pakistan, Xiaohong Yang. “Pakistan can maintain a stronger growth trajectory through domestic and regional stability, improving overall competitiveness, revitalising public sector enterprises, as well as timely completion and effective use of infrastructure projects.”

Private consumption remained the largest contributor to growth in FY2017 (ending 30 June 2017), contributing 80 per cent of GDP and growing by 8.6 per cent. To support growth, the State Bank of Pakistan (SBP)—the country’s central bank—maintained its policy rate at 5.75 per cent in FY2017, allowing domestic credit to expand by 13.1 per cent and private sector credit to grow by 16.8 per cent. In January 2018, SBP raised its policy rate by 25 basis points to 6 per cent and the credit growth slowed in the first 8 months of FY2018.

Demand pressures have increased imports resulting in a widening current account deficit and steady drawdown of foreign exchange reserves, showing the need for policy tightening. To mitigate the eroded competitiveness and help boost Pakistan exports, SBP has permitted a greater flexibility of rupee-dollar exchange rate since December 2017, with the rupee depreciating by 9.7 per cent by the end of March 2018.

Agriculture rebounded for the second year in a row, with buoyant domestic demands coming from the People’s Republic of China-Pakistan Economic Corridor (CPEC) and other infrastructure projects. During FY2004-2011, exports grew by 10.7 per cent per year; since then exports have declined by an average of 2.6 per cent annually. Over the past decade, meanwhile, exports as a share of GDP have contracted significantly, from 11.2 per cent in 2007 to 7.2 per cent in 2017, far below the 28 per cent average in developing Asia.

Average inflation in Pakistan in FY2017 reached 4.2 per cent, edging up slightly by 1.3 per cent from the previous ear, when global prices were lower. Food inflation averaged 3.8 per cent and strong domestic demand pushed core inflation, which leaves out food and energy to an average of 5.2 per cent from 4.2 per cent in FY2016.

The consolidated federal and provincial budget deficit climbed to 5.8 per cent of GDP in FY2017, well above the target of 3.8 per cent and 4.5 per cent of last year due to slow revenue collection and increased development expenditure. Tax revenue marginally grew by 8.4 per cent compared to 21.3 per cent the previous year. At the same time, development expenditure surged by 30 per cent underpinned by a sharp increase in total expenditure by 17.3 per cent.

Whereas the budget deficit may moderate slightly in FY2018, as spillover from higher investment expenditure is expected to widen the current account deficit. Therefore, securing adequate financing to fill the gap in foreign exchange reserve is an additional challenge.

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