The Asian Development Bank (ADB) on Thursday said Pakistan’s economic outlook was uncertain, with high risks on the downside, as political uncertainty would remain a key risk to the sustainability of stabilisation and reform efforts.

In its April 2024 ‘Asian Development Outlook’, the Manila-based lending agency said potential supply chain disruptions from the escalation of the conflict in the Middle East would weigh on the economy.

With Pakistan’s large external financing requirements and weak external buffers, disbursement from multilateral and bilateral partners remains crucial, it said, adding that these inflows could be hampered by lapses in policy implementation.

The ADB highlighted that support from the International Monetary Fund (IMF) for a medium-term reform agenda would considerably improve market sentiment and catalyse affordable external financing from other sources.

The report projected that economic growth in Pakistan for the FY2025 would reach 2.8 per cent, driven by higher confidence, reduced macro-economic imbalances, adequate progress on structural reforms, greater political stability, and improved external conditions.

Growth was estimated to remain subdued during FY24 and pick up next year, provided economic reforms take effect, it said.

Meanwhile, real gross domestic product (GDP) was expected to grow by 1.9pc in 2024, driven by a rebound in private sector investment linked to progress on reform measures and transition to a new and more stable government.

The report further forecast that inflation will remain at about 25pc this year, driven by higher energy prices, but was expected to ease in 2025.

While improvement in food supplies and moderation of inflation expectations would likely ease inflationary pressures, further increases in energy prices envisaged under the IMF Stand-By Agreement were projected to keep inflation high, it observed.

Although improved supplies tempered food inflation, it remained high, driven largely by rising prices for energy and inputs to agriculture. Core inflation also remains elevated, reflecting domestic recovery and the pass-through of upward adjustments in energy prices, the ADB said.

On the supply side, it noted growth would be led by post-flood recovery in agriculture. The report said output would rise from a low base on improved weather conditions and a government package of subsidised credit and farm inputs supporting expanded area under cultivation and improved yields.

Higher farm output would help expand manufacturing, which would also benefit from the increased availability of critical imported inputs. Large-scale manufacturing expanded in three of the first six months of 2024, the report highlighted.

According to the report, the relaxation of import restrictions, coupled with economic recovery, was expected to widen the current account deficit.

However, imports were expected to expand during the year as domestic demand strengthened and the stabilisation of the currency market made it easier for firms to import inputs. Thus, the current account deficit was projected to widen to 1.5pc of GDP in 2024.

The report pointed out that Pakistan would continue to face challenges from substantial new external financing requirements and the rollover of old debt, exacerbated by tight global financial conditions.

The ADB said tax collection increased by 29.5pc, as reforms in the personal income tax, higher taxes on property transfers, and the reintroduction of taxes on cash withdrawals from banks and the issuance of bonus shares raised direct tax collections.

Revenue mobilisation was expected to strengthen in the medium term, reflecting planned reforms to broaden the tax base, it added.