ISLAMABAD: The Asian Development Bank has said that Pakistan’s economic outlook for fiscal year ending June 2023 has deteriorated under heavy flooding and the economy is already struggling to regain macroeconomic and fiscal stability.

The flood disruption and damage are expected to slow real GDP growth in combination with a tight monetary stance, high inflation, and an un-conducive global environment, ADB says in a supplement report to the Asian Development Outlook 2023 released on Wednesday.

The report says the catastrophic floods have dampened economic activity in Pakistan which was already affected by stabilisation efforts to tackle sizeable fiscal and external imbalances and double-digit inflation.

As wheat is usually planted from mid-October, flood damage threatens the upcoming agricultural season as well. Further, 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 floods have adversely affected cotton, rice and other important crops, the report says.

Pakistan economic outlook for fiscal year has deteriorated, says ADB report

The ADB report says the fiscal year 2023 forecast for Pakistan is weaker currency, higher domestic energy prices and flood-related crop and livestock losses and supply disruption, which have caused transitory food shortages and price spikes. Transportation difficulties have exacerbated these shortages and disrupted other domestic supply chains, broadening inflationary pressures and imposing production challenges.

The inflation projection for South Asia is increased marginally for 2022 from 8.1 per cent to 8.2 per cent and more substantially for 2023 from 7.4pc to 7.9pc. 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 remain unchanged. Inflation in India is still expected to rise to 6.7pc in fiscal year 2022 before falling back to 5.8pc.

According to the report, South Asia is on track to meet the growth forecast of 6.5pc in 2022, but the forecast for 2023 is downgraded slightly from 6.5pc to 6.3pc. The sub-regional revision for 2023 largely reflects lower forecasts for Bangladesh and Pakistan.

In Bangladesh, the recovery is hampered by external imbalances and unexpectedly high inflation, it says.

Three main headwinds continue to hamper recovery in developing Asia: recurrent lockdowns in China, the Russian invasion of Ukraine, and slowing global growth. Growth forecasts for the region are revised down from 4.3pc to 4.2pc in 2022 and from 4.9pc to 4.6pc in 2023.

Global economic prospects have worsened and the major advanced economies will expand slightly more than previously anticipated this year but are expected to endure sharp deceleration in 2023. Tightening monetary and financial conditions will drag on economic activity in the US and the euro area next year, with the latter likely to fall into a technical recession.

Despite this, inflation is forecast to continue to exceed central bank targets in both the US and euro area in 2023, necessitating continued tightening, and oil prices are projected to remain elevated.

The report warned that stubbornly high inflation in the US and other advanced economies could prolong the current monetary tightening cycle, and 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 pandemic or property market issues also threaten to jeopardise regional economic prospects. Similarly, a dangerous situation in the Russian Federation and Ukraine could renew surges in commodity prices, stoking global inflation and inducing further monetary tightening. Additional challenges are geopolitical tensions, notably worsening China-US relations and climate-related risks.

Published in Dawn, December 15th, 2022