ADB report: Low investment, power cuts adding to rich-poor gap

Structural problems to restrict growth to 3.6% against target of 4%.

ISLAMABAD:

The Asian Development Bank (ADB) has singled out power outages and falling investment as the biggest challenges to Pakistan’s economic growth, cautioning that these factors can further widen the gap between rich and poor.

The Manila-based lending agency, in its flagship report “Asian Development Outlook 2012: Confronting Rising Inequality in Asia” released on Wednesday, suggested to the government to detach Pakistan International Airlines, Pakistan Steel Mills and Pakistan Railways from government ministries. These state-owned enterprises are heavily draining fiscal resources and their losses are on the rise, it said.

“The economy continues to be affected by structural problems, including energy crisis, a precipitous decline in investment, persistently high inflation and security issues,” it said and added budget deficits remain high, driven by substantial subsidies and losses at state-owned enterprises, and tax revenues stay below target.

The bank feared that the country will miss the 4.7% budget deficit target for the 2011-12 fiscal year.

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

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 population) growing more slowly than the average.

Gross fixed investment has declined for four consecutive years, from about 21% of gross domestic product (GDP) 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, ADB said.

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

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

Cost recovery has not yet been achieved despite substantial increases in tariffs over the past two 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 state-owned power companies.

It said 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. ADB forecast 3.6% growth for the current year, which is 0.4 percentage point below government expectations. For next year, ADB has assessed 4% growth against government projection of 4.5%.

The bank projected average inflation of 12% for this fiscal year, which is in line with government expectations. On the assumption of a strengthened budget performance and broad stability in oil and other global commodity prices, inflation can ease to 10% next year.

ADB said despite a 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 budgeted amount, at slightly above 2% of GDP.

It said key energy-efficiency measures have been delayed and state-owned enterprises continue to absorb the losses.

Published in The Express Tribune, April 12^th, 2012.