Daily Times

KARACHI: With the new Pakistani government considering policy options to implement its economic and social agenda, twin deficits widened by a rising import bill and higher spending continue to pose a challenge, according to the Asian Development Outlook (ADO) Update 2018.

The report says the newly elected Pakistani government should address the large budget and current account deficits, rising debt obligations, and falling foreign exchange reserves. This requires mobilizing substantial external financing to buy time for orderly reform to reduce the large external and domestic imbalances.

Such resources can be acquired from bilateral and multilateral sources, the diaspora, or international capital markets. The key challenges are to adopt the right reforms and achieve good outcomes to sustain public support, the report noted.

“Pakistan’s economy has time and again shown resilience and the capacity to bounce back. Although formidable development challenges remain, we expect the stability fostered by the smooth political transition and the new government’s strong commitment to focus on pockets of vulnerabilities and implement pro-job and socioeconomic development policies that will stimulate robust, sustainable growth in the years ahead,” said ADB Country Director for Pakistan Ms. Xiaohong Yang.

“ADB will work closely with the government and the private sector to improve Pakistan’s basic public services, infrastructure, food and energy security, and attract investment and trade to create jobs and improve the quality of life of the country’s citizens.”

The ADO 2018 Update forecasts that if the government is successful in obtaining finance, Pakistan will have reasonable growth prospects for FY2019 on the strength of an improved security and energy supply, continued investment in the CPEC and other initiatives, and recognition of the need to rein in deficits. Challenges to maintaining the growth momentum are tighter monetary and fiscal policies to contain domestic demand, currency depreciation, and tension in the global trade environment. On balance, the update projects GDP growth in FY2019 at 4.8%, down by 1.0 percentage point from last year.

On the supply side, water shortages in some areas are likely to keep agricultural production below target in FY2019. Growth in manufacturing and services will likely be affected by fiscal and monetary tightening. On top of dealing with macroeconomic imbalances, the new government faces long-delayed decisions on raising tariffs to contain rapidly rising and potentially disruptive intercompany arrears in the energy sector-so called “circular debt” that exceeds PRs1.4 trillion, or 5% of GDP.

Average annual inflation is projected to reach 6.5% in FY2019 because of currency depreciation and elevated international oil prices. Inflation accelerated sharply for both food and other purchases in the first two months of FY2019, to 5.8% from 3.2% a year earlier. The SBP increased the policy rate by 100 bps to reach to 7.5% in July 2018 in an effort to contain the inflation pressure and is likely to continue further as part of its monetary tightening.

“The new government needs to move swiftly to put in place its macroeconomic policies including fiscal, monetary, tax, and trade reform policies to promote financial stability and growth. Pakistan needs to institute mechanisms to increase competitiveness, attract private sector investments, and strengthen the ease of doing business as well as Pakistan’s position in the global value chain,” said Ms. Yang.

Pakistan’s economy accelerated to 5.8%, the highest in 13 years, in Fiscal Year (FY) 2018 ending on 30 June 2018. The robust growth is credited to an uptick in industry, better agricultural crops, and an expanding services sector. Inflation remained moderate.

The update of the Asian Development Bank’s (ADB) flagship annual economic publication noted that the current account deficit in FY2018 swelled to $18 billion, or 5.8% of GDP, significantly up from 4.1% in FY2017. Exports revived to grow by 12.6% to $25 billion with increases in such traditional standbys as textiles, chemicals, leather, and food, but imports increased by 14.7% to $56 billion, partly spurred by purchases of machinery and transport equipment for the CPEC and other investments but also of intermediate goods for agriculture and the textile and metal industries, and of petroleum, which has accounted for just over a third of the increase in imports as current account deficit escalated over the past 2 years.

Published in Daily Times, September 27^th 2018.