Economy shows signs of recovery, ADB predicts 2.8 percent GDP growth for FY20

September 25, 2019: Indicating that Pakistan’s economy was showing signs of recovery owing to government’s fiscal consolidation and austerity measures, the Asia Development Bank (ADB), in its flagship economic publication, Asian Development Outlook (ADO), has projected Pakistan’s GDP growth rate at 2.8 percent during the fiscal year 2019-20.

Though slower than the last fiscal year (2018-19), the growth rate projections by ADB are higher than the GDP target of 2.4 percent set by the incumbent government for the fiscal year 2019-20 “Given the need for the authorities to address sizable fiscal and external imbalances, the economy is expected to slow further, with GDP growth projected at 2.8% in FY2020,” the ADO report said.

Fiscal adjustments are expected to suppress domestic demand and demand contraction would keep growth in manufacturing subdued. However, agriculture is expected to recover from weather-induced contraction this year with major incentives in the government’s agriculture support package included in the budget for FY2020.

The ADO added that on the external front, the trade deficit shrank by nearly half in July, the first month of FY2020, from $3.4 billion a year earlier to $1.8 billion.

With further narrowing of the trade deficit and a continued positive trend in workers’ remittances, the current account deficit is projected to narrow further to 2.8% of GDP in FY2020.

Import payments will remain subdued, reflecting weak economic activity and the pass-through of past rupee depreciation against US dollar. The real effective exchange rate is now thought to be near equilibrium, and a lower and more stable rupee is expected to improve export competitiveness.

The foreign capital inflows are expected to increase, it said adding that the foreign direct investment should revive as investors’ confidence was restored with implementation of the IMF stabilization and reform programme.

This should also help bring additional finance from multilateral institutions and other international partners, it added.

Along with the activation of a Saudi oil facility with potential disbursements of $1 billion in the current fiscal year, these developments are expected to raise foreign exchange reserves to reach more than $10 billion by the end of FY2020.

On the other hand, inflation remained elevated at the start of FY2020 at 9.4% in July and August. It is projected to accelerate further to average 12.0% in FY2020.

The report said that to restore macroeconomic stability, the government plans to catalyze significant international financial support and promote sustainable and balanced growth under a 3-year economic stabilization and reform programme with the International Monetary Fund (IMF).

Fiscal consolidation under the programme aims to reduce the large public debt while expanding social spending, establish a flexible exchange rate regime to restore competitiveness, and rebuild official reserves.

The economic reform programme supported by the IMF envisages a multi-year strategy for revenue mobilization to pare public debt to a sustainable level. The budget assumes tax revenue increased to equal 14.3% of GDP. With non-tax revenue projected at 2.3% of GDP in FY2020, total revenue is expected to increase to 16.6% of GDP.

Expenditure in FY2020 is projected to equal 23.8% of GDP with an increase of 1.8 percentage points in current spending to cover larger interest payments and higher allocations for v social spending

The budget deficit in FY2020 is expected to equal 7.2% of GDP, 1.7 percentage point lower than the FY2018 outcome.

According to the report, Pakistan’s economy in fiscal year (FY) 2019 had showed signs of recovery as the government’s fiscal consolidation and austerity measures to address the structural weaknesses started to take effect.

It noted that the current account deficit eased from 6.3% of gross domestic product (GDP) in FY2018 to 4.8% in FY2019.

The trade deficit narrowed by almost 11.5% to $28.2 billion as rupee depreciation drove down merchandise imports by 7.4%, particularly for goods other than petroleum.

Despite currency depreciation in real effective terms, merchandise exports declined by 2.2%, partly because low cotton production constrained textile exports. Workers’ remittances stirred from 3 years of near stagnation to grow by 9.7%, lending support to the current account.

Pakistan has done well in stabilizing the economy in face of strong challenges by taming the spiraling current account deficits and export bill and through robust implementation of reforms to improve governance and rejuvenating country’s competitiveness,” said Xiaohong Yang, ADB Country Director for Pakistan.

“Pakistan need to press ahead with macroeconomic and structural reforms; revitalizing public sector enterprises; improving revenue collection, energy and water security and leveraging improved security and regional cooperation opportunities, to secure the hard won gains and promote growth.”

The financial account surplus narrowed considerably in FY2019, by 16.2%, the $2.3 billion fall mostly accounted for by $1.8 billion less in foreign direct investment owing to policy uncertainty but also to the winding down of energy and infrastructure projects in the China Pakistan Economic Corridor.

However, notwithstanding large bilateral financing received from the People’s Republic of China, Saudi Arabia and the United Arab Emirates' gross foreign exchange reserves fell by $2.5 billion to $7.3 billion at the end of June 2019, or cover for 1.7 months of imports, noted the report.


Posted on: 2019-09-25T16:17:00+05:00