Warning that downside risks to Pakistan’s economic outlook remain exceptionally high, the Asian Development Bank’s latest report says the country’s adherence to an economic adjustment programme through April 2024 will be critical for restoring stability and the gradual recovery of growth.

Expansionary fiscal and monetary policy hit their limits while growth fell, inflation jumped, the rupee weakened, and international reserves shrank, said the Asian Development Outlook September 2023 published on Wednesday.

It said that gross domestic product (GDP) growth was projected to reach a moderate 1.9 per cent in FY2024, with price pressures remaining elevated.

On the external front, tighter global financial conditions and potential supply chain disruptions from any escalation of the Russian invasion of Ukraine would weigh on the economy, the report said.

It further said that amid the election season, persistent political instability would remain a key risk to implementing reform toward growth stabilisation, the restoration of confidence, and sustainable debt.

Disbursement from multilateral and bilateral partners would remain crucial for reserve accumulation, exchange rate stability, and improved market sentiment, the ADB report warned.

It said that the economy’s near term prospects would rely heavily on progress under the economic adjustment programme, which aimed to stabilise the economy and rebuild buffers for domestic and external balances, thereby providing a foundation for a possible successor programme under the new government.

It said that programme involved fiscal consolidation, monetary tightening, and a return to a market-determined exchange rate, as well as structural reforms in energy, state-owned enterprises, banking and climate resilience.

The report said the economy was projected to recover modestly in FY2024, however, uncertainty would linger and stabilisation measures would limit the growth of demand. Growth in FY2024 was projected to be 1.9pc, slightly lower than the forecast six months ago.

The revised projection assumed a modest rebound in demand, with private consumption and private investment growing by about 3pc and 5pc, respectively. Fiscal and monetary tightening would crimp demand, as would inflation staying in the double digits, the report said.

On the other hand, implementation of the economic adjustment programme and a likely smooth general election should boost confidence, while the easing of import controls should support investment as fiscal tightening restrains public consumption, the report said.

On the output side, better weather conditions would enable an increase in the area under cultivation and in yields, supporting recovery in agriculture. The government’s relief package of free seeds, subsidised credit, and fertiliser will also help. In turn, the recovery of farm output would feed through to the industry, which would also benefit from the increased availability of critical imported inputs.

The recovery of output would enable exports to pick up, although imports would grow much faster, due to pent-up demand. However, the downside risks were significant, including from global price shocks and slower global growth, it said.

The report further said that the FY2024 budget targeted a primary surplus of 0.4pc of GDP and an overall deficit of 7.5pc of GDP, gradually declining over the medium term.

Tax revenues were programmed to hit 10.3pc of GDP in fiscal year 2024. Provincial spending would be cut by 0.4pc of GDP and spending on defence and energy subsidies would be limited, while protecting priority social and development outlays. The government had committed to granting no further tax amnesties or issuing new tax preferences or exemptions.

It said that inflation was expected to ease in FY2024 as base year effects set in and food supply normalised. In addition, the central bank would likely raise the policy rate from the 22pc it set in July to gradually reduce inflation to its medium-term target of 5–7pc.

The report said the central bank had agreed to achieve positive real interest rates, refrain from introducing new refinancing schemes, and contain refinancing credits. However, it said that significant inflationary pressures remained.

It said that sharp increases in petroleum, electricity, and gas tariffs were envisaged under the adjustment programme. As import and exchange rate controls were eased, the rupee could further weaken, raising the cost of imported good, it said.

The El Nino climate pattern and the continuing Russian invasion of Ukraine could disrupt supplies and raise prices of wheat, rice, and other basic foodstuffs. Hence, inflation would likely remain high at about 25pc in FY2024, significantly higher than projected earlier, the report said.

It said that the current account deficit was projected to increase to about 1.5pc of GDP in FY2024. Despite the larger deficit, international reserves should grow, it added.

The report also noted that the new programme with the International Monetary Fund (IMF) had improved the prospects for multilateral and bilateral financing, while a more market-determined exchange rate was expected to stabilise the currency market and encourage remittance inflows through official channels.