ISLAMABAD: The Asian Development Bank (ADB) on Wednesday forecast Pakistan’s economy to slow down further and set the GDP growth target at 2.8 per cent for FY20 given the need for government to address sizable fiscal and external balances.

The ADB’s ‘Asian Development Outlook 2019 Update’ said fiscal adjustments would suppress domestic demand, and demand contraction will keep growth in manufacturing sector subdued. However, agriculture sector will recover from weather-induced contraction this year, with major incentives in the agriculture support package of the government included in the budget for FY20.

“Pakistan has done well in stabilising the economy in face of strong challenges by taming the spiralling current account deficit and export bill and through robust implementation of reforms to improve governance and rejuvenating country’s competitiveness,” said ADB’s Country Director for Pakistan Xiaohong Yang.

Commenting on the report, Yang said that, “Pakistan needs to press ahead with macroeconomic and structural reforms; revitalising public sector enterprises; improving revenue collection, energy and water security, and leveraging improved security and regional cooperation opportunities, to secure the hard won gains and promote growth.

“Pakistan needs to continue efforts to stabilise and protect the economy against external risks, rising global prices, current account deficit, rising debt servicing, and continued losses of public sector enterprise,” said Ms Yang.

Growth expected at 2.8pc for this fiscal year

Provisional estimates show GDP growth slowing from 5.5pc in FY18 to 3.3pc in FY19, lower than the Asian Development Outlook forecast of 3.9pc, the report highlights.

The ADB update estimates the FY20 budget deficit to clock in at 7.2pc of GDP – 1.7 percentage points lower than the deficit in FY18. Further, the financing needs are likely to be met through funds from external and non-bank sources after government discontinued borrowing from the central bank.

Further, resource allocation indicates a shift towards external borrowing, with net external financing estimated at Rs1.8 trillion or 4.2pc of GDP. Financing from non-bank sources is projected at Rs833bn or 1.9pc of GDP.

Expenditure in FY20 is expected to reach 23.8pc of GDP with increase of 1.8 percentage points in current spending to cover larger interest payments and higher allocations for social spending to avoid hurting the poor as reform progresses, according to the outlook.

At the same time, in order to support adjustment efforts, the government set the federal government wage increases below the inflation rate. Development spending is projected to rise to 3.6pc of GDP in FY20 and support stronger social spending in the budget, it says.

On the external front, the trade deficit shrank by nearly half in July, the first month of FY20, from $3.4bn a year earlier to $1.8bn. With further narrowing of the trade deficit and a continued positive trend in workers’ remittances, the current account deficit is projected to narrow further to 2.8pc of GDP in the ongoing fiscal year.

The ADB report says import payments will remain subdued, reflecting weak economic activity and the pass-through of past rupee depreciation against dollar. The real effective exchange rate is now thought to be near equilibrium, and a lower and more stable rupee is expected to improve export competitiveness.

Foreign capital inflows are likely to increase whereas foreign direct investment should revive as investors’ confidence restores with implementation of IMF’s stabilisation and reform programme. This should also help bring additional finance from multilateral institutions and other international partners.

Along with the activation of a Saudi oil facility with potential disbursements of $1bn in the current fiscal year, these developments are expected to raise foreign exchange reserves to reach more than $10bn by the end of FY20.

While inflation remained elevated at the start of the current fiscal year at 9.4pc in July and August, it is projected to accelerate further to 12pc on an average in the remainder of the FY20 because of a planned hike in domestic utility prices, taxes, and the lagged impact of currency depreciation.

Pressure from inflationary expectations can be relieved by government’s commitment to refrain from directly financing budget deficit by borrowing from the central bank as monetary policy continues to tighten.

The economic reform programme supported by the IMF envisages a multi-year strategy for revenue mobilization to pare public debt to a sustainable level. The budget assumes tax revenue increased to equal 14.3pc of GDP. With non-tax revenue projected at 2.3pc of GDP in FY20, total revenue is expected to increase to 16.6pc of GDP.

To strengthen fiscal discipline, the government has recently adopted the Public Financial Management Act in the context of the FY20 Finance Bill. Working with provincial governments, the federal government will prepare a fiscal strategy to align provincial expenditure and the annual deficit with budgetary targets that have been routinely breached.

Published in Dawn, September 26th, 2019