KARACHI: The Asian Development Bank (ADB) has asked Pakistan’s government to urgently address large budget and current account deficits, rising debt obligations, and falling foreign exchange reserves after it downgraded Pakistan’s economic growth rate forecast for the next financial year by 1 percent to 4.8 percent.
In its Asian Development Outlook 2018 update, ADB pointed out that challenges to maintaining growth momentum are tighter monetary and fiscal policies to contain domestic demand, currency depreciation, and tension in the global trade environment.
“Assuming government success in obtaining financing, Pakistan has reasonable growth prospects for FY2019 on the strength of improved security and energy supply, continued investment in the CPEC (China-Pakistan Economic Corridor) and other initiatives, and recognition of the need to rein in deficits,” the report added.
ADB added: “This requires mobilizing substantial external financing to buy time for orderly reform to reduce the large external and domestic imbalances. Such resources may be acquired from bilateral and multilateral sources, the diaspora, and international capital markets.
“Pakistan is estimated to have grown by 5.8 percent in the fiscal year to June 2018, higher than forecast of ADB in 2018, but the outlook is clouded by a large budget deficit, a deteriorating current account deficit, and falling foreign exchange reserves,” ADB reported.
Pakistan’s outgoing PML-N (Pakistan Muslim League Nawaz) government had targeted 6.2 percent growth rate of country’s economy for FY2019, which economists said was not a realistic figure.
“I have asked the government to present the correct picture. If the government is going to tell the exact number then the growth number will be consistent with ADB’s projection,” Dr. Ashafaque Hasan Khan, member of government’s Economic Advisory Council, told Arab News.
Pakistan’s current account deficit swelled to $18.1 billion — 5.8% GDP — during FY2018. “The current account deficit is now expected to moderate to 5 percent in FY2019, but exceed the projection of 4.5 percent,” ADB added.
ADB said that Pakistan’s exports are expected to continue to expand due to currency depreciation, fiscal incentives, and improved electricity supply and connectivity. However, slower growth in some advanced economies poses a risk to the forecast, as do rising trade tensions and protectionism.
“Growth in import demand will be contained by some scaling back of budgeted expenditure, additional import duties and taxes under discussion in the government, tighter monetary policy, and a freer exchange rate. The current account balance will benefit as well from more stable prices for oil and other imported commodities. Import growth already slowed in the first 2 months of FY2019. Worker remittances will continue to cushion the current account, but any significant increase will depend on more effort to tap diaspora resources,” the Asian lender noted.
Pakistan’s Finance Minister, Asad Umar, recently dispelled the impression of financial emergency in the country, in an interview with Arab News. “The government is battling on all fronts to curtail the balance of payment deficit. We are taking measures to increase exports, solving issues of Pakistani laborers in the Middle East, and curtailing imports. The combined outcome of the actions would reduce the balance of payment deficit,” he noted.
Dr. Salman Shah, former finance minister, told Arab News: “The government is not realizing how quickly the situation worsens. The impact of recent price hike of inputs (gas) are likely to have negative impact on the growth. Government should send credited signal in the market if they are going to the IMF or not.”
However, Dr. Ashfaque Hasan Khan warned against moving to IMF. “Forget about the growth rate, 10 million jobs and 5 million houses if we go to IMF because the IMF program is designed in such a way that it is a stabilization program. The program will curtail aggregate demand, and if there is no demand, who will produce? Growth will hover around 4 percent.”
Dr. Khan added: “The government has taken insufficient action in the budget (supplementary finance bill) that forces me to say that the government has decided to go to IMF.”
ADB also raised its Inflation forecast to 6.5 percent in FY2019 due to currency depreciation and higher international oil prices. Pakistan’s central bank had increased policy rate to 7.5 percent in July 2018 in an effort to contain inflation.
The bank will announce monetary policy for next two months and is expected to further raise policy rate. “The central bank is expected to raise policy rate by 100 bps as external account pressure continues despite measures taken by government”, Muhammad Sohail, financial expert and CEO of Topline Securities, said.
The Asian region is expected to meet the Asian Development Outlook 2018 forecast of 6 percent growth in 2018. The projection for 2019 has been trimmed by 0.1 percentage points to 5.8 percent. Excluding Asia’s high-income newly industrialized economies, the region is expected to expand by 6.5% this year and 6.3% in 2019, according to ADB.