Pakistan Economy to Keep Growing In FY18, Yet Clouded by Fiscal Challenges

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528 - Pakistan Economy to Keep Growing In FY18, Yet Clouded by Fiscal Challenges

Pakistan’s economy is projected to maintain strong growth in fiscal year (FY) 2018 as power supply in the country improves, manufacturing and crop harvests strengthen, and consumption and investments rise, according to a report by Asian Development Bank (ADB).

ADB, in its new report called Asian Development Outlook (ADO) 2018, expects gross domestic product (GDP) growth for Pakistan at 5.6% in FY2018 to sustain five years of upward movement. But it lowers down the expectation at 5.1% in FY2019 because of growing external account challenges faced by the country.

In the fiscal year 2017, private consumption served as the biggest growth impetus contributing 80% of GDP and growing by 8.6%. To support growth, the State Bank of Pakistan (SBP)—the country’s central bank—sustained its policy rate at 5.75% in FY2017, allowing domestic credit to expand by 13.1% and private sector credit to grow by 16.8%.

At the beginning of 2018, SBP raised its policy rate by 25 basis points to 6% and the credit growth slowed in the first eight months of the current fiscal year. While credit growth was slowing, demand pressures kept imports high, resulting in a widening current account deficit and steady drawdown of foreign exchange reserves. Declining exports pose a major challenge to the sustainability of external accounts, indicating a need for policy tightening.

Over the past decade, the share of exports in Pakistan’s GDP has diminished significantly, from 11.2% in 2007 to 7.2% in 2017, far below the 28% average in developing Asia. To mitigate the erosion of competitiveness and help lift Pakistan exports, SBP has permitted a greater flexibility of the exchange rate of rupee against dollar since December 2017, with the rupee depreciating by 9.7% by the end of last month.

According to the report, average inflation in Pakistan reached 4.2% in FY2017, a slight increase from 2.9% in the previous year. Food inflation averaged 3.8% and strong domestic demand pushed core inflation, which leaves out food and energy to an average of 5.2% from 4.2% in FY2016.

Also Read: China-Pakistan Economic Corridor

Inflation is expected to accelerate marginally to 4.8% in FY2019, reflecting increases in global oil prices and rupee depreciation against major currencies, ADB said.

The consolidated federal and provincial budget deficit ascended to 5.8% of GDP in FY2017, well above the target of 3.8% and 4.5% of last year due to slow revenue collection and increased development expenditure. Tax revenue marginally grew by 8.4% compared to 21.3% seen in the previous year. At the same time, development expenditure surged by 30% underpinned by a sharp increase in total expenditure by 17.3%.

Whereas the budget deficit may moderate slightly in FY2018, spillover from higher investment expenditure is expected to widen the current account deficit.

Other concerns were the rise in global oil prices and a firming outlook for higher interest rates in the US and global capital markets.

“Pakistan’s economic prospects in the coming years remain positive if budget and current account deficits are reduced and exports are rejuvenated by improving the country’s competitiveness,” said Xiaohong Yang, ADB Country Director for Pakistan, adding that Pakistan could maintain a stronger growth trajectory through domestic and regional stability, improving overall competitiveness, revitalising public sector enterprises as well as timely completion and effective use of infrastructure projects, especially the China-Pakistan Economic Corridor (CPEC) projects.

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