ISLAMABAD: Pakistan’s economy will continue to pick up during the current fiscal year as reform and stabilisation measures provide lift, with higher foreign exchange reserves, and softer inflation and oil prices also supporting the overall macroeconomic outlook, the Asian Development Bank (ADB) said in its annual economic report released on Wednesday.

The ‘Asian Development Outlook (ADO) 2016’ forecasts growth of 4.5 per cent for fiscal year ending June 2016, and 4.8pc for fiscal year 2016-17, assuming continued macroeconomic stability, expected improvement in energy supply, and planned infrastructure investment tied to an economic corridor project linking Pakistan with China.

Further implementation of structural reform will consolidate recent gains in macroeconomic stability and improve the investment climate amidst the improving security situation, especially in Karachi, the report notes.

While the outlook is for moderate gains in growth, the report also notes that continued public sector enterprise losses, insufficient energy and power evacuation capacity, and security concerns will continue to test the country’s economy.

“Pakistan needs to stay the course of macroeconomic and structural reforms, particularly in revenue collection, the energy sector, and in revitalising public sector enterprises that have been causing a fiscal drain,” said ADB Country Director for Pakistan Werner Liepach.

“These reforms are critical for fiscal and economic sustainability and to promote investment and economic growth,” he emphasised.

The key challenges impeding stronger economic growth include inadequate infrastructure and transport connectivity, weak governance and institutions, and limited access to finance which hinders investment in key infrastructure.

That in turn raises the cost of doing business, undermines productivity and hinders access to public services.

Low investment in human development has also left the country with a workforce lacking the skills needed to help the country compete in global markets and to increase productivity by producing goods with higher value, the report says.

Improved prospects for the economy, therefore, depend on faster implementation of ongoing reforms to alleviate power shortages, to expand fiscal space, to foster a competitive business environment and to liberalise trade.

The report says growth in industry is expected to be driven by strong expansion in construction and continued moderate expansion in mining, utilities and manufacturing, growth in large-scale manufacturing accelerated to 3.9pc in the first half of 2015-16 from 2.7pc in the same period of last year, supported by low prices for raw materials, improved gas and electricity supply, and expanded construction, as well as lower interest rates.

The ADB report adds agriculture is likely to continue to grow only moderately, as cotton output is projected to fall because of heavy rains in July last year and much lower global cotton prices.

However, continued strong expansion in livestock, which accounts for over half of agricultural production, will partly offset reductions elsewhere, it added.

Inflation is expected to average 3.2pc during current fiscal year, reflecting lower global oil and commodity prices.

The report notes the Federal Board of Revenue tax collection during the first half of fiscal year fell below target partly because lower oil prices undercut import duty collection.

Assuming some revival in prices for oil and other commodities, larger imports to support higher investment and growth, and some improvement in exports as factories enjoy better power supply, the current account deficit is projected to widen to 1.2pc of GDP in 2016-17, the report says.

The report concludes that a sustained reform effort will be required over the medium to long term to boost productivity and potential growth, building on the progress achieved so far. Reform needs to be supplemented by other policy measures, including the formulation of a well-coordinated industrial policy to support faster growth and revive exports.

While the government is committed to its reform programme, implementation challenges that include resistance from various stakeholders could slow progress. In addition, domestic security concerns remain despite improvement, and natural disasters are a perennial downside risk. The price of oil remains a wildcard, the ADB report further concludes.

Published in Dawn, March 31st, 2016