Rich-poor gap to widen further due to power outages, falling investment: ADB

ISLAMABAD: The Asian Development Bank (ADB) singled out power outages and falling investments as the biggest challenges to the country’s economic growth, cautioning that due to these factors, the divide between the rich and poor is set to widen further in Pakistan.

The Manila-based lending agency’s flagship report, “Asian Development Outlook 2012: Confronting Rising Inequality in Asia”, has also suggested that the government detach Pakistan International Airlines, Pakistan Steel Mills and Pakistan Railways from its ministries.

The ADB said that these state-owned enterprises are heavily draining fiscal resources and their losses are on the rise.

“The economy continues to be affected by structural problems, including the energy crisis, a precipitous decline in investment, persistently high inflation, and security issues,” said the ADB, adding, “Budget deficits remain high, driven by substantial subsidies and losses at state-owned enterprises, and tax revenue below target. It has said that the government will miss its 4.7% revised budget deficit target.

“With low investment and economic growth below the pace needed to accommodate the predominately young population, the rich–poor income gap is set to widen further”, cautioned the lending agency.

The ADB said evidence from the Household Integrated Economic Survey of Pakistan indicates a widening income gap between rich and poor, with income for the two lowest quintiles (40% of the population) growing more slowly than the average.

The ADB said the gross fixed investment has declined for 4 years, from about 21 per cent of Gross Domestic Product in 2007 to 11.8% in FY2011, the lowest rate since 1974.

This trend raises concerns that production capacity is being eroded, undermining growth prospects for the near and medium term, said the ADB.

“Power is the main constraint for economic growth, as load-shedding intensifies and becomes less predictable”. Estimates from the Planning Commission suggest that losses arising from power and gas shortages held down GDP growth by 3–4% during the last two years.

The current system, with tariff and collections below cost recovery, is a major deterrent to investment for capacity expansion in the sector, said the ADB.

Cost recovery has not yet been achieved despite substantial increases in tariffs over the past 2 years, and measures to bring down costs have not been effective.

For every unit of power sold, there is a loss to the sector reflected in the form of subsidies or accumulation of losses in the state-owned power companies.

The ADB said that unless progress can be made in resolving these fundamental problems, the growth outlook will stay modest.

The economy is expected to grow modestly without a more predictable energy supply and improved investment flows.

It has forecasted 3.6% growth rate for current year, which is 0.4% below the government expectations.

While for the next year the ADB has assessed 4% growth against the government’s projections of 4.5%.

The ADB has projected average 12% inflation for this fiscal year which is in line with the government’s expectations.

It said on assumptions of a strengthened budget performance and broad stability in oil and other global commodity prices, inflation could ease to 10% next year.

The ADB said, despite significant increase in electricity prices through automated pass-through of input price, the overrun on energy subsidies is expected to be more than triple the amount budgeted, at slightly above 2% of GDP.

According to the ADB, key energy-efficiency measures have been delayed and state-owned enterprises continue to absorb the losses.