Pakistan's economic growth may pick up to 6.5 percent next year: ADB
ISLAMABAD (April 03 2008): Economic growth in Pakistan is expected to be moderate, to 6.3 percent, in the 2007-08 and may slightly pick up, to 6.5 percent in 2008-09. The forecast is lower than the average 7 percent growth rate during the recent years, Asian Development Bank (ADB) said in a report on Wednesday.
The growth momentum in Pakistan, Bangladesh and Sri Lanka will be affected by economic deceleration in major markets. The growth in these South Asian countries will be affected mainly by moderation of growth in India, said the ADB annual report 'Asian Development Outlook (ADO) 2008'.
The forecast for the current and next fiscal years are also lower than Pakistan's own projections of maintaining growth trajectory of around 7 percent as stipulated in the five-year (2005-10) programme. In its recent report, the State Bank of Pakistan (SBP) also stated that growth rate could be around 6 to 6.5 percent in the current fiscal year.
The ADB forecast looks to be a bit speculative as the new government is yet to announce its economic policy. Most of the ADB forecast is based on SBP figures. It is still premature to forecast growth for Pakistan, which is in transition and a lot may depend on next budget. It will be seen whether new political regime gives growth-oriented budget or it will give relief to the common man, said an independent analyst.
"Political uncertainty and the security environment and formation of the government may curtail investment and drag down economic performance," said the ADO. Revenue shortfalls produced by slowing economic activity and expenditure overruns may limit fiscal space and reduce public investment. This may affect private investment and growth, said the report.
The declaration of November 2007 emergency and the downgrading of Pakistan credit rating outlook resulted in net outflow of $243 million from special convertible Pakistan rupee account held by foreigners during November 2007.
The ongoing energy shortages caused by an ageing energy infrastructure, chronic underinvestment in expansion and maintenance, and unsustainable pricing regimes slow production and badly affect domestic and foreign investment.
According to the report, Pakistan could face difficulties in global financial market that could further affect capital inflows. In addition, planned issues of global depository receipts may not materialise.
The agriculture growth will be lower than earlier expected because of pest attacks and floods. These two factors are resulting in shortfall in cotton production in moderating textile manufacturing sector growth and an overall slowdown in large-scale manufacturing sector growth in the first six months of 2007-08.
Despite tight monetary conditions and moderating growth, inflation is expected to overshoot SBP's target 6.5 percent and reach 8 percent. There would be continued pressure on food prices and pass-through of some higher global oil prices. The tight monetary policy will have only a limited impact on controlling food inflation.
The fiscal deficit is likely to exceed the government target of 4 percent of the GDP in the current fiscal year. In the election year, the government deferred the pass-through of higher international oil prices to consumers until March 1. The ADO says the increase in the prices of petroleum products by the government is small in relation to the international oil price rise. The government subsidy on this account expanded to Rs 60 billion.
With fiscal deficit widening and external inflows remaining subdued, the government borrowings from SBP in 2007-08 had risen more than threefold by January 2008 relative to the same period in the last fiscal year.
The current account deficit in the first 7 months of the current fiscal worsened by 47 percent compared with the same period of the last fiscal year and is likely to widen to 6.3 percent of the GDP for the full year.
The income account may also feel the strain of larger external borrowing by the government to finance the deficits, the increased cost of commercial borrowing resulting from downgrading Pakistan credit rating outlook from stable to negative in November 2007 and the start of payments in 2008 on the debt rescheduled by the Paris Club.
The ADB has suggested that Pakistan has to build greater capacity to finance its investment needs with internal resources ie savings. Pakistan will also have to improve competitiveness of exports, attract FDI in manufacturing industries and expand tax base.
Business Recorder [Pakistan's First Financial Daily]
