ISLAMABAD – Pakistan’s economy is expected to grow 4 percent in the coming financial year starting July 1, picking up steam again after devastating floods pushed back growth to around 3 percent this year, officials said on Thursday.
“We are looking at a growth rate of 4 percent for the next year because of a good services sector and on hopes of better farm output,” said a Finance Ministry official who did not want to be identified. The figure compares with a 3.7 percent growth forecast by the Asian Development Bank (ADB) in its Outlook 2011 report released on Wednesday.
The ADB expects persistent energy problems and security issues will continue to check Pakistan’s growth in 2011/12, with surging inflation posing a further major risk. Nuclear-armed Pakistan, a critical U.S. ally in the fight against Islamist militancy, has struggled to revive its sluggish economy even after securing an $11 billion loan from the International Monetary Fund in November 2008 after a balance of payments crisis.
Last year, the worst-ever floods to hit the country inflicted $10 billion in losses, forcing officials to slash growth estimates to between 2.5-3.0 percent for the current year, down from an expected 4.5 percent. The services sector, however, is likely to grow by 4 percent in the current year to June, and there are signs that the farm sector is recovering from the flooding.
The National Economic Council, a top economic-decision making body, will meet next month to firm up yearly targets. Higher cotton, rice and sugar output is expected in the coming year, analysts said. “We expect that 2011/12 will be much better than this year … Our own (growth) forecast is close to 4.5 percent,” said Standard Chartered Bank economist Sayem Ali.
An official at the Planning Commission, which prepares growth targets, also spoke of likely 4 percent growth next year, but said that was contingent on continuing support from remittances from Pakistanis working abroad and on exports, which have grown by 20-25 percent in the first eight months o f the current financial year.
However, the large-scale manufacturing sector, which dominates the overall industry making up 12.2 percent of Pakistan’s GDP, remains a major concern as it faces chronic energy shortages and high interest rates that discourage private sector borrowing.
The sector grew 1.03 percent up to January, against 2.34 percent in the same period the previous year. “Energy shortfalls are lowering real growth by at least 2 percent points annually,” the ADB said in its report. Improved prospects for Pakistan’s economy, however, will largely depend on the implementation of measures to address key problems such as inflation, the budget deficit and the need for transparent revenue policies, according to the ADB.
“Increasing prices are on the warning level, not just for Pakistan but for the whole region,” said Rune Stroem, ADB’s Pakistan country director.
The ADB forecasts inflation in Pakistan will quicken to 16 percent in 2011, the highest in Asia. The central bank chief said this week that quick steps were needed to broaden the tax base in Pakistan, which has one of the lowest tax-to-GDP ratios in the world, currently around 10 percent.
The IMF has not yet released the latest tranche of the $11 billion loan due in May last year because of the government’s inability to implement a reformed general sales tax, seen as a key to expanding the tax base. The fiscal deficit, meanwhile, is expected at between 5.3 and 5.5 percent of GDP in 2010/11, but could be higher if some external flows, including grants, are not received soon.
ADB’s Stroem said the 5.5 percent deficit estimates seemed unrealistic, and there were signals these might slip even further. Analysts say rising global oil prices would probably be the biggest risk to Pakistan’s economy in 2011. The country imports nearly 80 percent of its oil needs.
