ADB paints gloomy picture of Pakistan economy

Published: September 25, 2019
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ISLAMABAD: The economic growth rate in Pakistan will be 2.8% — the lowest in South Asia — and the inflation rate will be 12% — the highest in the block of eight nations — in this fiscal year, the Asian Development Bank (ADB) projected on Wednesday in its latest report.

In its flagship, the Asian Development Outlook (ADO) Update 2019, the Manila-based lending agency has cut the economic growth rate forecast of Pakistan but markedly increased inflation projections compared with the numbers given in six-month-old ADO.

However, the press release that the ADB country office issued after the release of the ADO Update did not fully reflect the deterioration in key economic indicators.

There appeared mismatch between the ADB report, released from Manila Headquarters, and press release that was issued by the Islamabad office.

“Pakistan’s economy in fiscal year 2019, which ended on 30 June, is showing signs of recovery as the government’s fiscal consolidation and austerity measures to address the structural weaknesses started to take effect,” stated the ADB in its handout.

When The Express Tribune requested the ADB’s External Relations head, Ismail Khan, to defend the opening of the press release he replied, “There are signs of recovery in the current account deficit, foreign exchange reserves and the IMF deal will also improve economic prospects.”

However, the ADB’s report showed deterioration in real economic growth rate and inflation, besides pointing out challenges posed by the high fiscal deficit and growing public debt.

Given the need for the authorities to address sizable fiscal and external imbalances, the economy is expected to slow further, with GDP growth projected at 2.8% in the fiscal year 2019-20, according to the report that the ADB released on Wednesday.

Earlier, the ADB had projected a 3.6% growth rate for the current fiscal year.

“Pakistan has done well in stabilising the economy in face of strong challenges by taming the spiraling current account deficits and export bill and through the robust implementation of reforms to improve governance and rejuvenating country’s competitiveness,” said ADB Country Director for Pakistan Xiaohong Yang.

This ADO Update raises the 2019-20 inflation projection for Pakistan, markedly higher at 12.0% in anticipation of planned tariff hikes for domestic utilities, higher taxes, and especially the lagged impact of currency depreciation.  The 12% projections were far higher than the April 2019 forecast of 7% inflation for this fiscal year by the ADB.

The Pakistan Tehreek-e-Insaf (PTI) government has already twice increased electricity and gas tariffs and yet the ADB has revealed that another round of tariffs hike is on the cards.

Not only that the Islamabad Capital Territory (ICT) administration has also increased property taxes and water usage charges by up to 300%.

The ADB report said currency depreciation in a few economies—especially Georgia, Kazakhstan, and Pakistan—have raised prices for imported food directly and further raised them indirectly through higher prices for imported fuel, fertilizer, and animal feed.

At 2.8% growth rate, Pakistan’s economy will be the slowest growing economy in a bloc of eight South Asian nations. Like the last fiscal year, Bangladesh’s economy will be fastest-growing at a rate of 8%, followed by India that is projected to grow at 7.2% rate and Maldives and Nepal at 6.3%.

Even war-torn Afghanistan is projected to grow at a 3.5% rate in this fiscal year.  Overall, South Asia’s growth momentum has softened and growth forecasts are lowered to 6.2% for 2019 and 6.7% for 2020.

The GDP growth rate in Pakistan will decelerate for the third consecutive year that will include two years of the government of Prime Minister Imran Khan.

Due to low growth coupled with the shrinking purchasing power of the inflation, unemployment, and crime rates have significantly gone up. The daylight robberies and burglaries are reported even in the heart of the capital and one such incident took place on Wednesday morning at Margalla Town, which is just five kilometers away from the Bani Gala residence of Imran Khan.

The posh sectors of Islamabad are also at the mercy of the dacoits. These sectors are part of the constituency of former finance minister Asad Umar.

In its report, the ADB said fiscal adjustments are expected in this fiscal year that will further suppress domestic demand, and demand contraction will keep growth in manufacturing subdued.

However, 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 ADB has not commented on the reality of the fiscal targets, although it mentioned these budgetary projections in the report.

The economic reform programme, which is supported by the IMF, envisages a multiyear strategy for revenue mobilisation to pare public debt to a sustainable level, according to the lender.

The ADB said the budget deficit in this fiscal year is expected to equal 7.2% of GDP—still large but 1.7 percentage point lower than the last fiscal year. The financing of the deficit is expected to come mostly from external and non-bank sources.

Resource allocation indicates a shift toward external borrowing, with net external financing estimated at Rs1.8 trillion, or 4.2% of GDP. Financing from nonbank sources is projected at Rs833 billion, or 1.9% of the GDP.

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 2.8% of GDP in FY2020 -0.2% lower than the earlier ADB projections but higher than the government estimates.

The import payments will remain subdued, reflecting weak economic activity and the pass-through of past rupee depreciation against the 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, said the ADB.

The ADB hoped that the foreign direct investment should revive as investors’ confidence is restored with the implementation of the IMF stabilization and reform programme.

This should also help bring additional finance from multilateral institutions and other international partners. Along with the activation of a Saudi oil facility with potential disbursements of $1 billion in the current fiscal year, these developments are expected to raise foreign exchange reserves to reach more than $10 billion by the end of FY2020.

The bad performance last year

The ADB said the economic growth rate slipped to 3.3% in the last fiscal year due to lower investment amid policy uncertainty and persistent macroeconomic imbalances. In the last fiscal year, contraction in gross fixed investment trimmed growth by 1.3 percentage points, mostly reflecting significantly reduced public investment as the government cut development spending and the near completion of energy and transport projects, including those initiated under the China-Pakistan Economic Corridor.

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