Pakistan economy continues in positive growth prospect, but challenges remain

KARACHI: Pakistan’s economy in Fiscal Year (FY) 2017 (ended 30 June 2017) accelerated to 5.3% mainly on recovery in agriculture and stronger manufacturing.

Better weather and improved yields of major crops boosted agriculture growth by 3.5% from 0.3%, while manufacturing grew by 5.3% from 0.7%.

Strong wholesale and retail trades, finance and insurance, and general government services also edged up the growth in services sector to 6.0% from 5.5%.

The State Bank of Pakistan maintained its policy rate at 5.75%, allowing domestic credit to expand by 13.1% making private sector credit grew by 67.3% (i.e. from PRs447 billion to PRs748 billion), the strongest expansion in recent years.

In FY2018, GDP growth prospect is expected to accelerate further to 5.5% assuming for better growth prospects in advanced and developing economies, a continued revival in world trade volumes, and continued improvement in the security and business environment. The main impetus for growth in Pakistan will be expanded by CPEC infrastructure investments, other energy investments, and government development expenditure.

“The Pakistan’s positive economic outlook shows its strong resilience, but the country needs to better protect itself against the emerging risks and works towards improving its competitiveness, revenue collection, energy supply, revitalizing public sector enterprises, and leveraging greater public-private partnerships to maintain the growth momentum, boost infrastructure spending and improve overall service deliveries” said Xiaohong Yang, ADB’s Country Director for Pakistan.

While the overall economic trajectory remains robust, the report noted that increasing global prices, current account deficit, falling foreign exchange reserves, and continued losses of public sector enterprise can threaten the growth prospect.

Stronger domestic demand and reviving global prices for oil and other commodities pushed inflation higher to average 4.2% of GDP in FY2017 from only 2.9% a year earlier, which was the lowest rate in the past decade, and with higher global prices for oil and other commodities, inflation is expected to increase further.

In FY2017, the current account deficit widened to 4.0% of GDP from 1.7% a year earlier as imports rose sharply while exports and remittances declined. Meantime, revenue only increased 0.2% of GDP. As a result, the general government budget deficit increased to 5.8% of GDP from 4.6% a year earlier. Imports increased by 17.5%, while exports and remittance declined by 1.4% and 3%, respectively. The government financed the twin deficits largely through domestic bank loans of around 70%, as external borrowing increased by half to finance 30% of the deficits. Foreign exchange reserves were also drawn down to fill the financing gap of less than 1%.

The capital and financial account surplus increased sharply by more than 40%, reflecting increased borrowing by the government, private sector, and commercial banks as foreign direct investment stagnated. With the higher current account and fiscal deficits, the gap must be financed by drawing on official foreign reserves, which declined by $2 billion to $16.1 billion at the end of FY2017. This can cover 3.7 months of imports.

The Pakistan rupee remained stable supported by central bank open market operations, but the currency has been on a rising trend in real effective exchange terms, eroding Pakistani competitiveness by 3.6% in FY2017 on a widening inflation differential. The authorities may need to consider a gradual currency adjustment at some point to maintain domestic competitiveness, rein in import growth, and prevent weakening of foreign exchange reserves.

“In the near future, the Government of Pakistan must carefully manage external debt, the balance of payments and their financing requirements, while instituting macroeconomic and structural reforms to support economic stability and expansion as well as to make Pakistan more competitive and for fiscal sustainability. This has become increasingly important given the increasing government and CPEC-related repayment obligations” added Ms Yang.

ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth, and regional integration. Established in 1966, ADB is celebrating 50 years of development partnership in the region. It is owned by 67 members—48 from the region. In 2016, ADB assistance totaled $31.7 billion, including $14 billion in cofinancing.