As India is poised to become an engine of global growth, Pakistan just across the border will have yet another year of modest economic expansion because of a lack of appetite for reforms, predicts the Asian Development Bank (ADB) in a new report.
The Asian Development Outlook – the flagship publication of the ADB – has projected 4.2% economic growth for the current financial year 2014-15 against the target of 5.1%. It will be the second year in a row when the PML-N government will miss the key goal in the face of failure to introduce reforms in the areas of energy, taxation and public sector enterprises.
“Pakistan has been quite successful in stabilising the economy but the challenge is how to move towards more growth,” said Werner Liepach, the ADB’s country director for Pakistan.
Unveiling the glimpses of key challenges that Pakistan was facing on the economic front, Liepach told the government in plain words to seize the moment following the reduction in oil prices and go for serious reforms.
He said the reduction in oil prices had provided a breather to the government, which should be used for fiscal reforms.
The ADB’s projections show that India will grow at a faster pace of 7.8% in the current fiscal year, even higher than the 7.3% projected economic expansion for China.
India has eagerness for growth through reforms. “If India can do it, why cannot Pakistan,” remarked Liepach. He appealed to the country “not to squander the historical opportunity for reforms” that came in the guise of sharply lower oil prices.
He said ongoing efforts to make the power sector financially viable and reforms of public sector enterprises through restructuring and privatisation were vital for macroeconomic gains. The outstanding circular debt was around Rs300 billion, he said.
ADB’s Senior Economics Officer Farzana Noshab pointed out that the 4.1% economic growth that Pakistan claimed to have achieved last year was subject to downward revision as well.
That gross domestic product (GDP) growth, she said, was built on a 5.2% provisional expansion in the large-scale manufacturing (LSM) sector last year. However, final results put the LSM reading at 3.9%, pulling down the overall growth rate to below 4%.
Noshab said the LSM industry was not performing in the current fiscal year as well, reflecting continued energy shortages, low and declining investment in the sector and weak external demand for Pakistan’s exports.
She said the agriculture and services sectors were also projected to expand moderately in the current fiscal year.
Pakistan’s Real Effective Exchange Rate – the weighted average of Pakistan’s currency value relative to a basket of major currencies adjusted for the effects of inflation – appreciated 7.7% till January. This somehow neutralised the benefits of duty-free access to the European markets, she said.
Noshab was of the view that though fiscal deficit was so far in line with the annual projection, it would certainly increase due to the spike in security spending in the second half of the fiscal year.
She said the government was controlling its borrowings from the central bank, but there was a significant increase in SBP’s injections into the money market – an indication that banks were lending the government by borrowing from the State Bank.
According to the ADB’s findings, foreign direct investment in Pakistan was mostly stagnant while portfolio investment was picking up. But it cautioned that portfolio numbers should be watched carefully as there was a lot of volatility in the Karachi Stock Exchange.
The ADB also advised the government to further build up its foreign exchange reserves as the current level was not sufficient to absorb any external shock.
Overall, the Asia region is projected to grow at a pace of 6.3% and the growth is dependent on reforms, recovery in advanced economies and reduction in commodity prices.
Published in The Express Tribune, March 25th, 2015.