Macroeconomic and security challenges continue to weigh on the economy. Growth is expected to remain modest in Fiscal Year 2014, largely reflecting fiscal consolidation to deal with high deficits that have caused macroeconomic imbalances. The government has embarked upon a program of fiscal and structural reform, supported by an Extended Fund Facility Arrangement with the International Monetary Fund, to restore macroeconomic balance, relieve energy shortages, and guide the economy toward faster and more sustainable growth.

Economic performance

Moderate growth in gross domestic product (GDP) in FY2013 reflected weak macroeconomic fundamentals in recent years. Investment remained low as energy shortages and security concerns continued to undermine investor confidence. Fiscal pressures kept the budget deficit very high for the second consecutive year. At the same time, however, inflation fell into single digits. Stable global commodity prices, Coalition Support Fund (CSF) inflows, and continued growth in worker remittances reined in the current account deficit.

GDP growth slowed to 3.6% in FY2013 (ended 30 June 2013) as weak expansion in the large service sector more than offset improved growth in manufacturing.

Selected Economic Indicators (%) - Pakistan 2014 2015
GDP Growth 3.4 3.9
Inflation 9.0 9.2
Current Account Balance (share of GDP) -1.4 -1.3

Source: ADB estimates.

Economic prospects

GDP growth is projected at 3.4% for FY2014, marginally slower than in FY2013. Agriculture is expected to be weaker due to a drop in cotton output, which partly offset the improvement in sugarcane and rice crops. Ongoing rains, however, may benefit the upcoming wheat crop, despite a reduction in the sowing area this year.

Weak agriculture will be partly compensated by the pickup in large-scale manufacturing, which grew by 6.7% during the first 6 months of FY2014, three times the rate during the same period a year earlier. Larger and more reliable power supply, partly reflecting better controls on unscheduled load shedding, as well as increasing use of alternative fuels is helping to revive the production of food, fertilizers, chemicals, electronics, and leather products, while petroleum refinery output continued its robust growth. Textiles are expected to recover from existing weak growth as they benefit from Generalized Scheme of Preferences Plus status granted by the European Union from January 2014. Improved manufacturing performance will spur retail and trade activity. Performance in transport and communication will, however, continue to be affected by financial losses incurred by Pakistan Railways and Pakistan International Airlines.

On the demand side, private consumption will remain the main driver of economic growth, supported by the sustained inflow of remittances, low real interest rates, and better credit availability at banks. Government spending will be contained by fiscal consolidation to bring down the budget deficit, but accelerated credit flows to the private sector during the first 7 months of FY2014 indicate an uptick in private investment. Net exports are expected to be modestly negative as import growth quickens to support improved capacity utilization in manufacturing.

GDP growth is expected to be higher in FY2015, at 3.9%, as the impact of fiscal consolidation eases somewhat, energy supplies improve, and the global economy strengthens.

Source: ADB. 2014. Asian Development Outlook 2014. Manila.