Pakistan Continues Upbeat Growth Prospect, But Challenges Remain | Asian Development Bank

Pakistan Continues Upbeat Growth Prospect, But Challenges Remain

News from Country Offices | 26 September 2017

ISLAMABAD, PAKISTAN (26 September 2017) — Pakistan’s economy in fiscal year (FY) 2017, which ended on 30 June, accelerated to 5.3% on the back of recovering agriculture and stronger manufacturing, according to a new Asian Development Bank (ADB) report.

In an update of its flagship annual economic publication, Asian Development Outlook (ADO) 2017, ADB noted that better weather and improved yields of major crops boosted Pakistan’s agriculture growth by 3.5% from 0.3%, while manufacturing grew by 5.3% from 0.7%. Strong wholesale and retail trades, finance and insurance, and general government services also edged up the growth in the services sector to 6% from 5.5%.

The State Bank of Pakistan, meanwhile, maintained its policy rate at 5.75%, allowing domestic credit to expand by 13.1% and making private sector credit grow by 67.3%, the strongest expansion in recent years.

In FY2018, gross domestic product (GDP) growth is expected to accelerate further to 5.5% assuming for better growth prospects in advanced and developing economies, a continued revival in world trade volumes, and continued improvement in the security and business environment. The main impetus for growth in Pakistan will be expanded by China-Pakistan Economic Corridor (CPEC) infrastructure investments, other energy investments, and government development expenditure.

“Pakistan’s positive economic outlook shows its strong resilience, but the country needs to better protect itself against the emerging risks and work towards improving its competitiveness, revenue collection, energy supply, revitalizing public sector enterprises, and leveraging greater public-private partnerships to maintain the growth momentum, boost infrastructure spending, and improve overall service deliveries,” said Xiaohong Yang, ADB's Country Director for Pakistan.

While the overall economic trajectory remains robust, the report noted that increasing global prices, current account deficit, falling foreign exchange reserves, rising debt servicing, and continued losses of public sector enterprise can threaten growth prospects.

Stronger domestic demand and reviving global prices for oil and other commodities pushed inflation higher to average 4.2% of GDP in FY2017 from only 2.9% a year earlier, which was the lowest rate in the past decade. With higher global prices for oil and other commodities, inflation is expected to increase further.

In FY2017, the current account deficit widened to 4% of GDP from 1.7% a year earlier as imports rose sharply while exports and remittances declined. Revenue, on the other hand, slightly increased to 0.2% of GDP. As a result, the general government budget deficit increased to 5.8% of GDP from 4.6% a year earlier. Imports increased by 17.5%, while exports and remittance declined by 1.4% and 3%, respectively. The government financed the twin deficits largely through domestic bank loans of around 70%, as external borrowing increased by half to finance 30% of the deficits. Foreign exchange reserves were also drawn down to fill the financing gap of less than 1%.

The capital and financial account surplus increased sharply by more than 40%, reflecting increased borrowing by the government, private sector, and commercial banks as foreign direct investment stagnated. With the higher current account and fiscal deficits, the gap must be financed by drawing on official foreign reserves, which declined by $2 billion to $16.1 billion at the end of FY2017. This can finance 3.7 months of imports.

The Pakistani rupee remained stable, supported by central bank open market operations. But the currency has been on a rising trend in real effective exchange terms, eroding Pakistani competitiveness by 3.6% in FY2017 on a widening inflation differential. The authorities may need to consider a gradual currency adjustment at some point to maintain domestic competitiveness, rein in import growth, and prevent the weakening of foreign exchange reserves.

“In the near future, the Government of Pakistan must carefully manage external debt, the balance of payments, and their financing requirements, while instituting macroeconomic and structural reforms to support economic stability and expansion, as well as to make Pakistan more competitive and fiscally sustainable. This has become consistently important given the increasing government and CPEC-related repayment obligations,” said Ms. Yang.

ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth, and regional integration. Established in 1966, ADB is celebrating 50 years of development partnership in the region. It is owned by 67 members—48 from the region. In 2016, ADB assistance totaled $31.7 billion, including $14 billion in cofinancing.