The government will have a hard time achieving economic targets according to the Asian Development Bank which has painted a gloomy picture of Pakistan’s economy, forecasting that the national output will pick up modestly this year with unrelenting inflation and signs of a weakening external financial position.
The ADB Outlook 2011 Update, released on Wednesday, kept unchanged a modest economic growth forecast for Pakistan. It projected that the economy will strengthen slightly in the fiscal year 2012 and may grow 3.7 per cent. This projection is much lower than the official estimate of 4.5 per cent.
The Manila-based lending agency pegged even this growth rate to the recovery of the agricultural sector, which in turn depends on weather conditions.
According to a United Nations’ rapid assessment report, floods in Sindh have damaged 80 per cent of standing crops this year. The government has already lowered its cotton production target to 14.5 million bales from the original projection of 16 million. This will also negatively affect export growth.
The ADB forecasts that expansion of the services sector will continue but growth in large-scale manufacturing might be muted, given that the power supply situation is unlikely to improve.
“Pakistan must have average seven per cent annual growth to absorb the 3 per cent increase in its labour force every year,” it said, adding the population was young, with more than 65 per cent under the age of 30 years. With average economic growth of less than three per cent over the last three years, it has been too low to take advantage of these favourable demographics.
In its April 2011 edition of the Asian Development Outlook, the ADB had forecast a 2.5 per cent growth for fiscal year 2011 that eventually remained at 2.4 per cent.
The ADB projected that inflation would stay high, easing back slightly to an average of 13 per cent in fiscal year 2012. Citing reasons, it said the planned upward adjustments in electricity prices and restoration of automatic pass-through of fuel price increases to consumers would build strong inflationary pressures into the economy.
Against the government’s expectations of a continuous strong external financial position, the ADB said the current account position of external payments and receipts was seen to be weakening in 2012. It forecast a slower export growth of 8 per cent mainly reflecting less favourable export prices and import growth of 14 per cent, mirroring still-high commodity prices and some economic strengthening.
The government has estimated that even in a worst case scenario, exports will grow at a pace of six per cent and imports will not grow more than 10 per cent.
The ADB did, however, support the government’s expectations of strong growth in remittances. It said worker remittances were set to stay strong, providing a buffer for the large trade deficit and limiting pressures on foreign exchange reserves as external debt payments climbed sharply.
It saw the current account deficit – gap between external payments and receipts – staying at 1.3 per cent of gross domestic product, lower than the Asian Development Outlook 2011 projection of 2.3 per cent.
The ADB said achieving an ambitious 4 per cent budget deficit – gap between income and spending – hinged on the government’s ability to contain subsidies and boost revenues.
The government has budgeted Rs50 billion power sector subsidies, fixed on the assumption that power sector reforms will be undertaken from July. Though two and a half months have passed, the government has failed to initiate meaningful reforms, putting a burden of Rs22.5 billion per month on national coffers. On this basis, it has already consumed Rs50 billion in subsidies.
The ADB also pegged Rs730 billion spending on development projects to the government’s ability to limit current expenditures and mobilise domestic resources.
Published in The Express Tribune, September 15th, 2011.
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@Hammad siddiqui
The 3% is actually Real-GDP growth rate. Nevertheless it is not at all enough considering the high population growth rate in Pakistan.
@Meekal Ahmed: In Pakistan, the composition and computation of non-oil non-food inflation makes it highly misleading and undermines its importance. It is heavily influenced by house rent index, (which should actually be called construction index). Moreover, if you take the year on year HRI inflation for every month and plot it, you will see an unbelievably smooth cyclical curve which is highly predictable.
FBS recently announced that it is going to replace the current HRI with an HRI that is based on actual surveys. Although it sounds good, but I am sure that after a few months FBS officials will start extrapolating the numbers. And thus Core inflation will become more meaningless than what it is now.
Pakistan's economy is averaging around 3% growth for the last 3 years. That means in real terms a negative growth of about 3% in the last three years. I would think that touching a 7% growth is impossible due to factors beyond control of our economic managers.
The only possible way is to plug corruption, this will provide some relief to the economic stress.
This seems to be a balanced and sensible view from the AsDB. I have no disagreements with the thrust of their assessment except that the fiscal deficit is more likely to be closer to 6.5-7.0% of GDP or in line with what has been achieved in recent years.
On inflation, they are only taking about the headline rate. I wish they had a view on non-oil, non-food inflation which is a better indicator of underlying inflationary pressures in the economy. Will this abate?