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Updated 27 Sep, 2017 08:30am

Asian Development Bank fears downside risks

ISLAMABAD: Calm has returned to Pakistan following the political uncertainty heightened by the Supreme Court’s decision to disqualify Nawaz Sharif as the prime minister, but still possible loss of momentum for making policy decisions may hamper prospects for economic growth in the country, said the Asian Development Bank in an update to its annual economic report published on Tuesday.

The report feared that there are downside risks, pointing out that growth has improved but the PML-N government – which will continue to lead until new parliamentary elections are held by the third quarter of 2018 — needs to address fiscal and external sector vulnerabilities that have reappeared with the wider current account deficit, falling foreign exchange reserves, rising debt obligations, and consequently greater external financing needs

The update of ‘Asian Development Look 2017’ notes that GDP growth is expected to accelerate to 5.5 per cent in Pakistan assuming better growth prospects in advanced and developing economies alike, a continued revival in world trade volumes, and continued improvement in the security and business environment.

The main impetus for in­dustry and services growth will be expanded China-Pak­istan Economic Corridor (CPEC) infrastructure invest­­ments, other energy investments, and government deve­lopment expenditure. Agri­cul­­ture should expand by trend rates, the report says.

A key challenge will be to finance Pakistan’s burgeoning trade deficit as remittance inflows, however substantial, continue to fall.

Better prospects for global growth and trade are expected to further the recent improvement in export performance, however weak, in FY17.

Exports are likely to take off, though, only with adequate and reliable power supply and other supporting infrastructure and policy. The report says that imports are expected to continue to increase as growth spurs domestic demand that domestic production cannot meet.

July 2017 imports were, though 8pc less than the peak in June, 50.9pc above a year earlier. Petroleum accounted for a quarter of the increase, while imports doubled for power generation machinery and construction, much of it apparently related to the CPEC.

Worker remittances have shown some unexpected improvement, however, in the first two months of FY18, increasing by 13.2pc from the same period in FY 2017. If this rebound can be sustained for the rest of FY18, it may ameliorate the projected deficit, the ADB report believed.

In any case, the authorities may need to consider rapid currency depreciation at some point to rein in import growth, or increase foreign borrowing to finance the external gap, to prevent any undue weakening of foreign exchange reserves, the ADB cautioned.

ADB report says that over the medium term, increasing government and CPEC-related repayment obligations highlight the need to carefully manage external debt, the balance of payments, and their financing requirements, while instituting macroeconomic and structural policies to support economic stability and make Pakistan more competitive.

Published in Dawn, September 27th, 2017

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