Pakistan’ GDP rate to remain 3%, ADB study

The Asian Development Bank (ADB) has said that if the Pakistan government failed to obtain external resources for budget support than it would be cut the development spending.

In the annual report “OUTLOOK 2009”, the ADB said on Tuesday that the Pakistan’s economic outlook in FY2010 will be shaped by both internal policies and global economic developments.

On balance, a modest revival in economic growth to about 3.0% is projected for FY2010, predicated on the planned larger public expenditure program announced in June 2009 in the budget for FY2010 and on some easing of monetary policy. Agriculture is expected to continue its strong growth on the back of higher procurement prices for the main crops and increased public spending in the sector as announced in the budget. But agricultural growth will not be as high as in FY2009 due to the high base effect and continued water scarcity that will limit crop expansion, the ADB said.

It said that the growth in industry is expected to turn marginally positive in FY2010 as the commissioning of new power plants reduces electricity outages, and as adjustments in power tariffs generate cash flow for power companies to expand their operations.

The report said that to contain huge fiscal deficit target, it is expected to be made available under the pledges made by donors at the Friends of Democratic Pakistan meeting in Tokyo in April 2009.

Consequently, a massive 54% hike is planned for the PSDP in FY2010. (Under an augmentation of the standby arrangement approved by the IMF Board on 7 August 2009, IMF has agreed to provide bridge financing of up to 0.8% of GDP to support the budget in case of delays in the receipt of funds pledged at Tokyo.) The Government in FY2010 also plans additional spending of 0.3% of GDP funded by donor grants to support rehabilitation of internally displaced people in areas affected by operations against militants said in the report.

The large planned development expenditure overshadows the real contraction in current spending envisaged in the budget and results in an overall expansionary fiscal stance. The budget proposals project a modest effort to generate additional tax revenue. Development expenditure is set to increase by 1.6 percentage points of GDP in FY2010, while additional receipts to be raised by the FBR amount to 0.4 percentage points of GDP. The external resource requirement in the budget is therefore large and equivalent to about 80% of the planned PSDP, indicating an unsustainable dependence on foreign inflows, it said.

The ADB’ view that the services account is projected to improve, mainly reflecting higher logistical payments. It is uncertain whether the trend increase in workers’ remittances will be sustained. However, based on the continued strong growth of workers of 25% in the first 2 months of FY2010 and evidence of strong numbers of workers proceeding abroad for employment, workers’ remittances are assumed to hold steady in FY2010. The current account deficit is expected to be 4.8% of GDP in FY2010, somewhat improved from a year earlier.

The report said that as non-debt-creating inflows in the form of new foreign direct and portfolio investment remain little improved in FY2010, the financing of the current account deficit will need to continue relying on debt-creating inflows. These will include financing through the standby arrangement, augmented by disbursements from development partners.
The economic outlook carries downside risks and challenges. Although Pakistan’s economic imbalances were reduced in FY2010, structural improvements in the underlying fundamentals are needed, without which it will be difficult to sustain financial stability and growth, it said.
In particular, fiscal sustainability requires critical measures to improve revenue mobilization through broadening the tax base and removing exemptions, improving tax policy and administration, and quickly adopting a full-fledged value-added tax. Meeting the fiscal deficit target purely by cutting development expenditure is not a viable policy option for a country that requires large-scale spending on infrastructure and social sectors to sustain growth and reduce poverty, the bank said in the report.
Likewise, improvement in the current account through a contraction in imports alone is unsustainable. The current account will be fundamentally improved only when the Government pushes through with effective measures to build a much larger export base that is sufficient to finance oil, machinery, and other essential imports. This issue is crucial in an era of rising global oil prices, it said .

Pakistan’s growth prospects continue to be stymied by its lingering power crisis. Both immediate and long-term measures are required to address the crisis including improving governance; reducing leakages and losses; rationalizing electricity tariffs to cover sector costs and eliminate subsidies; and resolving the problem of “circular debt” (arrears that have developed among participants in the sector), which has drained the finances of the power companies and has forced cuts in their operations and investments, the bank stated.

The ADB said that multilateral development partners are supporting power sector reforms and are financing critical investments to improve and augment electricity transmission, distribution, and generation systems. However, the size and effectiveness of this assistance will depend on the Government’s ability to implement its reform agenda.

It said that the global recession, if prolonged, poses an obvious risk to Pakistan’s economic recovery and stabilization through weakening exports, workers’ remittances, and inflows of private capital. It is critical that the pledges made by donors in Tokyo are realized to finance the PSDP in support of Pakistan’s growth and poverty reduction strategy.


Source: sananews.com.pk

Publication date: 12/16/2009

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