ISLAMABAD: Bringing down its growth forecast for Pakistan’s economy to 3.5pc, from 4.5pc projected in April, the Asian Development Bank (ADB) on Wednesday linked the country’s medium-term prospects to the restoration of political stability and uninterrupted implementation of the IMF programme to rebuild economic stability and fiscal and external buffers.

In its Asian Development Outlook (ADO) 2022 Update, the Manila-based multilateral lending agency also noted Pakistan’s rate of inflation going up to 18pc for the current fiscal year against its previous forecast of 8.5pc made in April but attributed it chiefly to the lagged impact of unsustainable energy and fuel subsidies of the previous government.

“Pakistan’s medium-term prospects hinge critically on the restoration of political stability and the continued implementation and deepening of reforms under the revived IMF EFF programme to stabilise the economy and rebuild fiscal and external buffers,” the ADB said.

The economic outlook will also depend on the continued availability of adequate external financing under challenging domestic and global economic and political conditions.

Says economic outlook depends on political stability, IMF programme

It warned that the potential economic consequences of the recent severe floods heighten the already significant risks to the outlook, including the elevated inflation rate, possible fiscal slippage as general elections approach, and a higher-than-projected increase in global food and energy prices.

The ADO Update revised down the growth forecast for FY23 to 3.5pc from the 4.5pc projection made in ADO 2022 in April, as economic activity will be curtailed by ongoing stabilization efforts to tackle sizable fiscal and external imbalances. The growth rate had touched 6pc last fiscal year ending June 30, 2021.

Fiscal consolidation, apart from relief for flood damage, and monetary tightening are expected to suppress domestic demand, the ADB explained adding that a contraction in demand, together with capacity and input constraints created by higher import prices from the rupee’s large depreciation, will reduce industry output.

Agriculture growth is expected to moderate on high input costs, including electricity, fertilisers, and pesticides. Slower growth in agriculture and industry will in turn diminish services growth, particularly wholesale and retail trade. This apparently showed, although the bank has not indicated, that the latest impact of floods had not been taken into account for the growth forecast as the government is now projecting 2pc to 2.5pc of GDP growth rate.

The ADB said inflation was expected to accelerate in FY23 as new tax measures announced in the budget, together with an increase in the wheat support price and planned upward adjustments to electricity tariffs, are expected to keep inflationary pressures high. The year-on-year consumer price index inflation rate was at 24.9pc in July 2022.

This update substantially revises up the forecast for headline inflation for FY23 to 18pc from the earlier 8.5pc projection due to a potentially strong second-round impact from the rupee’s depreciation and fuel and energy price adjustments.

It noted that private consumption last year was also lifted by fuel and electricity subsidies in response to the sharp rise in global oil prices. These subsidies, however, were unsustainable. Investment growth slowed during FY22, despite a noticeable rise in public investment from government efforts to expand infrastructure and affordable housing. “Despite strong GDP growth, macroeconomic vulnerabilities quickly arose as a sharp expansion in domestic demand and a steep rise in global oil and commodity prices caused imports to grow much faster than exports,” the ADB said while going back in FY22 for current economic challenges.

Net exports reduced growth by 2.7 percentage points. A notable widening of the trade deficit, along with fiscal slippages, lackluster progress on structural reforms, and limited capital inflows, also contributed to Pakistan’s balance of payments difficulties. “The current account deficit (CAD) rose some sixfold to $17.4bn (4.6pc of GDP) in FY22 from $2.8bn (0.8pc) in FY21,” it said.

The CAD is forecast to narrow to 3pc of GDP in FY23 on a sharp slowdown in economic growth, measures to curtail nonessential imports, and the pass-through effect of the rupee’s large depreciation.

Published in Dawn, September 22nd, 2022