Warning that downside risks to Pakistan’s economic prospects remain exceptionally high, the latest report from the Asian Development Bank (ADB) says the cash-strapped country’s adherence to an economic adjustment program until April 2024 will be essential to restore stability and gradual recovery of growth.
Expansionary fiscal and monetary policy reached its limits as growth fell, inflation soared, the rupee weakened and international reserves dwindled, Dawn News cited the September 2023 Asian Development Outlook report.
The report said gross domestic product (GDP) growth was projected to reach a moderate 1.9 percent in fiscal 2024, and price pressures would remain elevated.
On the external front, tighter global financial conditions and potential supply chain disruptions due to any escalation of Russia’s invasion of Ukraine would weigh on the economy, the report said.
He further said that, in the midst of the election season, persistent political instability would remain a key risk for the implementation of reforms aimed at stabilizing growth, restoring confidence and sustainable debt.
The ADB report warned that disbursements from multilateral and bilateral partners would remain crucial for reserve accumulation, exchange rate stability and improving market sentiment.
He said the economy’s near-term prospects would depend largely on progress under the economic adjustment program, which aimed to stabilize the economy and rebuild buffers for internal and external balances, thus providing a basis for a possible successor program under the new government.
He said the program 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 fiscal 2024; However, uncertainty would persist and stabilization measures would limit demand growth.
Growth in fiscal 2024 was projected to be 1.9 percent, slightly lower than forecast six months ago.
The revised projection assumed a modest pick-up in demand, with private consumption and private investment growing around 3 percent and 5 percent, respectively.
The fiscal and monetary adjustment would affect demand, just as inflation would remain in double digits, according to the report.
On the other hand, the implementation of the economic adjustment program and a likely calm general election should boost confidence, while the easing of import controls should support investment as fiscal adjustment restricts public consumption, according to the report.
On the production side, better climatic conditions would allow an increase in the cultivated area and yields, supporting the recovery of agriculture.
The government’s aid package that includes free seeds, subsidized credit and fertilizers will also help.
In turn, the recovery of agricultural production would be transferred to industry, which would also benefit from the greater availability of critical imported inputs.
Recovery in production would allow exports to recover, although imports would grow much faster due to pent-up demand.
However, downside risks were significant, including global price shocks and slower global growth, it said.
The report further said that the budget for fiscal year 2024 targeted a primary surplus of 0.4 percent of GDP and an overall deficit of 7.5 percent of GDP, gradually declining over the medium term.
Tax revenue was scheduled to reach 10.3 percent of GDP in fiscal year 2024.
Provincial spending would be cut by 0.4 per cent of GDP and spending on defense and energy subsidies would be limited, while priority social and development outlays would be protected. The government had committed not to grant any more tax amnesties or issue new tax preferences or exemptions.
He said inflation was expected to decline in fiscal 2024 as base year effects set in and food supplies normalized.
Additionally, the central bank would likely increase the policy rate from the 22 percent it set in July to gradually reduce inflation to its medium-term target of 5.7 percent.
The report said the central bank had agreed to achieve positive real interest rates, refrain from introducing new refinancing schemes and contain refinancing loans. However, he said significant inflationary pressures remained.
According to the report, sharp increases in oil, electricity and gas rates are planned within the framework of the adjustment program.
As import and exchange rate controls are eased, the rupee could weaken further, raising the cost of imported goods, he said.
The El Niño weather pattern and the continued Russian invasion of Ukraine could disrupt supplies and raise prices for wheat, rice and other staple foodstuffs. Inflation will therefore likely remain high, around 25 percent in fiscal 2024, significantly higher than previously projected, according to the report.
He said the current account deficit is projected to rise to about 1.5 percent of GDP in fiscal year 2024. Despite the higher deficit, international reserves should grow, he added.
The report also noted that the new program with the International Monetary Fund (IMF) had improved prospects for multilateral and bilateral financing, while a more market-determined exchange rate was expected to stabilize the foreign exchange market and encourage the inflow of remittances through official channels. Sunrise.
Pakistan’s economy has been in free fall for the past few years, putting untold pressure on the poor masses in the form of rampant inflation.
In July, the IMF transferred $1.2 billion to cash-strapped Pakistan as part of the nine-month, $3 billion bailout program to support the government’s efforts to stabilize the country’s ailing economy.
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