The Asian Development Bank (ADB) said on Wednesday that Pakistan’s economic outlook for the fiscal year ending in June 2023 has “deteriorated under heavy flooding” while the “economy was already struggling to regain macroeconomic and fiscal stability”.

In the supplement report titled ‘Asian Development Outlook 2022 Supplement’, ADB said flood disruption and damage in the country are “expected to slow real Gross Domestic Product (GDP) growth in combination with a tight monetary stance, high inflation, and an un-conducive global environment”.

The report said catastrophic floods this year have “dampened economic activity” in Pakistan, which was already affected by “stabilisation efforts to tackle sizeable fiscal and external imbalances and double-digit inflation”.

Growth and inflation outlook in Pakistan

Moreover, the ADB report highlighted that flood damage in Pakistan threatened the upcoming agricultural season as well, as wheat is usually planted from mid-October.

It said the flooding is expected to have spillover effects on industry — notably textiles and food processing — and on services, in particular wholesale trade and transportation.

The report added that the floods had adversely affected cotton, rice and other important crops that are grown in the country.

The fiscal year 2023 forecast for Pakistan has been revised to reflect a “weaker currency [and] higher domestic energy prices” along with “flood-related crop and livestock losses and supply disruption, which have caused transitory food shortages and price spikes”, ADB elaborated in the report.

It further explained that transportation difficulties had “exacerbated these shortages and disrupted other domestic supply chains, broadening inflationary pressures and imposing production challenges”.

Growth and inflation outlook in South Asia

According to the ADB, South Asia is on track to meet the growth forecast of 6.5pc in 2022 but the forecast for 2023 has been downgraded slightly from 6.5pc to 6.3pc.

It further said sub-regional revision for 2023 largely reflected “lower forecasts for Bangladesh and Pakistan” as recovery in Bangladesh was also “hampered by external imbalances and unexpectedly high inflation”.

It projected inflation for South Asia — comprising of Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka — to increase from 8.1pc in September to 8.2pc in the recent December update.

However, the estimated inflation figures for the year 2023 had a more substantial increment from 7.4pc to 7.9pc.

The report said that the sub-regional revision for 2023 largely reflects higher inflation forecasts for Bangladesh, Nepal, Pakistan and Sri Lanka.

Inflation forecasts for elsewhere in the sub-region in 2023 remained unchanged while inflation in India is expected to rise to 6.7pc before falling back to 5.8pc in the fiscal year 2022.

Asia outlook and risks

The supplement report highlighted three main headwinds continued to hamper recovery in the ‘developing Asia’ region — recurrent lockdowns in China, the Russian invasion of Ukraine, and slowing global growth.

Growth forecasts for the region — consisting of 46 developing members of the ADB — were revised down from 4.3pc to 4.2pc in 2022 and from 4.9pc to 4.6pc in 2023.

According to the ADB, global economic prospects have worsened since the September update.

It also said major advanced economies would expand slightly more than previously anticipated this year but are expected to endure sharp deceleration in 2023.

Regarding economic activity in the United States and Europe, the report said tightening monetary conditions — when interest rates are increased to limit the amount of money that people and companies can borrow — along with financial conditions would drag the economic activity next year with the Euro area likely to fall into a technical recession.

However, the update highlighted that inflation is expected to continue to exceed central bank targets in both the US and Euro area in 2023. It would also necessitate continued tightening while oil prices are projected to remain elevated.

The ADB report warned “stubbornly high inflation in the US and other advanced economies” could prolong the current monetary tightening cycle.

It further cautioned that the synchronised nature of the squeeze may bring “overly restrictive monetary stances and unnecessary output and employment losses”.

Further growth deceleration in China caused by the Covid-19 pandemic or property market issues also threatened to “jeopardise regional economic prospects”, the report added.

The ADB also warned that a “dangerous situation in the Russian Federation and Ukraine could renew surges in commodity prices, stoking global inflation and inducing further monetary tightening”.

It listed additional challenges to the Asian economy as well: geopolitical tensions, notably worsening China–US relations, and climate-related risks.