Asian Development Bank issues outlook report for Pakistan

The Asian Development Outlook 2019 (ADO) of the Asian Development Bank reaffirms that the country's economy is expected to grow more slowly than last year, with projected GDP growth of 2.8 percent in fiscal year 2020.

Read: The economy suffers a significant setback in fiscal year 19, the growth rate slows to 3.3pc

The ADO, published on Wednesday, notes that growth in Pakistan slowed during fiscal year 2019 and this reflected "lower investment amid political uncertainty and persistent macroeconomic imbalances."

"The considerable depreciation of the currency accelerated inflation, but helped substantially reduce the current account deficit," he said.

The report indicated that the Pakistani authorities are implementing a "comprehensive fiscal consolidation and monetary adjustment program to stabilize the economy and address structural weaknesses."

According to the report, provisional estimates have found that GDP growth slowed from 5.5pc in fiscal year 2018 to 3.3pc in 2019.

He points out that, on the supply side, all sectors had "contributed substantially less" to GDP growth than the previous year. While, on the demand side, private consumption has accounted for 82{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} of GDP "despite higher inflation and borrowing costs."

In the updated assessments, the ADO notes that the rupee depreciated against the US dollar by 24{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} in fiscal year 2019 and inflation was also higher at 7.3{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} compared to fiscal year 2018 at 3.9{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5}.

The report indicated that the increase in inflation "mainly reflects the depreciation of the currency and a considerable increase in domestic fuel prices."

In addition, he discovered that the largest fiscal deficit was financed mainly through internal loans, while the current account deficit had been reduced from 6.3 percent of GDP in fiscal year 2018 to 4.8 percent of GDP in fiscal year 2019.

In addressing the outlook for the country, the ADO said: "To restore macroeconomic stability, the government plans to catalyze significant international financial support and promote sustainable and balanced growth under a 3-year economic reform and stabilization program with the Monetary Fund International (IMF) Fiscal consolidation under the program aims to reduce large public debt while expanding social spending, a flexible exchange rate regime is established to restore competitiveness and official reserves are rebuilt. "

The report found that fiscal adjustments would suppress domestic demand and, in turn, the contraction of demand would maintain "moderate" manufacturing growth.

However, he discovered that agriculture was expected to recover with the help of the government's agricultural support package.

The report projected that inflation, which was 9.4 percent in July and August, would increase to 12 percent in fiscal year 2020 due to "a planned increase in the prices of domestic public services, the taxes introduced into the budget of the fiscal year 2020 and the lagged impact of currency depreciation. "

"The pressure of inflationary expectations can be relieved by the government's commitment to refrain from directly financing the budget deficit through loans from the central bank as monetary policy continues to tighten."

"The IMF-backed economic reform program provides for a multi-year strategy for income mobilization to reduce public debt to a sustainable level. The budget assumes that tax revenues increased to 14.3 percent of GDP. With non-tax revenues projected to 2.3 percent of GDP in fiscal year 2020, total revenues are expected to increase to 16.6 percent of GDP. "

In addition, spending in fiscal year 2020 is expected to equal 23.8 percent of GDP, while the budget deficit in fiscal year 2020 is expected to be equal to 7.2 percent of GDP.

"To strengthen fiscal discipline, the government recently adopted the Public Financial Administration Law in the context of the FY2020 finance bill."

Meanwhile, the report found that the trade deficit had been reduced by "almost half" in the first half of July.

"With a further reduction of the trade deficit and a continuous positive trend in workers' remittances, it is projected that the current account deficit will be further reduced to 2.8pc of GDP in fiscal year2020. Import payments will remain moderate , reflecting the weak economic activity and the transfer of the depreciation of the last rupee against the US dollar. "

"It is now believed that the real effective exchange rate is close to equilibrium, and a lower and more stable rupee is expected to improve export competitiveness."

In addition, foreign capital inflows are expected to increase.

"Foreign direct investment should revive as investor confidence is restored with the implementation of the IMF reform and stabilization program.

"This should also help to bring additional financing from multilateral institutions and other international partners," the report said, adding that the activation of a Saudi oil facility with a potential outlay in the current fiscal year was expected to increase foreign exchange reserves to over $ 10 billion by the end of fiscal year 2020.