Pakistan's Growth to Remain Firm, But High Oil Prices A Risk

ISLAMABAD, PAKISTAN (8 September 2005) - After posting much better-than-expected growth last fiscal year at 8.4%, Pakistan's economy is projected to grow by 6.5% in FY2006, Asian Development Outlook 2005 Update (Update), an ADB report released today, forecasts.

Compared to the forecast of the Asian Development Outlook 2005 - the flagship ADB publication that tracks economic trends in the Asia-Pacific region - output at the end of FY2006 is expected to be about half a percentage point lower. The downward revision in growth for FY2006 from the earlier estimate of 7% is an artifact of a higher base.

The Update says the economy is on solid ground due to sound macroeconomic fundamentals, enhanced private investment, and significant expansion in the public sector development program.

Following two years of aggressive growth, large-scale manufacturing is expected to settle with a still-robust but more sustainable growth rate of 11% in FY2006. The exemption of major export industries from the general sales tax and the withdrawal of import duty on raw materials and other supplies will further boost this sector.

Agriculture sector growth is likely to decelerate in FY2006, mainly because of the high base set the previous year. "It will also be difficult to sustain last year's record cotton output because of already heavier monsoon rains and greater moisture, which increase crop vulnerability to pests," the Update says. "Further, the damage caused by recent floods to standing crops will depress agricultural production." Agricultural output is projected to grow by only 3% in FY2006, as against 7.5% in FY2005, the highest in nine years.

The Update raises Pakistan's inflation projections for FY2006 to 8.5%, as against an earlier forecast of 5%. Shortages of essential food items, higher housing rents, a steep rise in oil prices, and strong domestic demand pushed inflation in FY2005 to 9.3%, the highest rate in eight years.

"Further tightening of monetary policy and the opening up of imports to wheat and other essential food items will dampen inflationary pressures in FY2006. However, expansionary fiscal policy, high oil prices, and the large monetary overhang may make it difficult to contain inflation," the Update adds.

Exports are expected to post a brisk 15% growth in FY2006, due to incentives announced in the current budget, continued modernization of the textile industry, and the ending of the Multi-Fiber Arrangement quotas in January 2005.

Amid the generally positive outlook, the report points out that high oil prices may negatively affect Pakistan's economy.

"If [international oil prices] remain at current levels, or go higher, projections for imports, the fiscal deficit, and inflation may have to be revised upward, while any negative impact on the global economy could lead to lower growth of exports," the Update cautions.

About ADB