–Until macroeconomic imbalances are alleviated, outlook is for slower growth, higher inflation, pressure on the currency, and heavy external financing
–Growth in tax collection weakened from a robust 16.4pc in the first half of FY18 to only 2.7pc a year later
In its flagship economic publication titled, ‘Asian Development Outlook (ADO) 2019’, the bank forecasts Pakistan’s GDP growth to decline to 3.9pc in FY19 because of the persisting macroeconomic challenges.
For FY18, ended June 30, 2018, the estimated GDP growth rate (was) revised downward from earlier 5.8pc to 5.2pc. Therefore, growth slowed from 5.4pc a year ago. The growth decelerated despite revived agriculture. The expansionary fiscal policy markedly widened the budget and current account deficits and drained foreign exchange, the report said.
Until macroeconomic imbalances are alleviated, the outlook is for slower growth, higher inflation, pressure on the currency, and heavy external financing, which is needed to maintain even a minimal cushion of foreign exchange reserves. Recurrent crises in the balance of payments require that firms become more export competitive, it said.
Inflation is expected to rise sharply to an average 7.5pc in FY19, driven by continued heavy government borrowing from the central bank, hikes in domestic gas and electricity tariffs, further increase in regulatory duties on luxury imports, and the lagged impact of currency depreciation by more than 10.7pc since July 2018.
According to the report, as far as current account deficit is concerned, it is likely to remain high at around 5pc of GDP. This is attributed to large trade deficit. The bank said it will further be narrowed to 3pc in FY20 with easing macroeconomic pressures on the external accounts.
Foreign exchange reserves declined $6.3 billion to $9.9 billion at the end of FY18, sufficient to finance less than two months of imports of goods and services. These external pressures caused the Pakistani rupee to depreciate 11.7pc against the dollar from December 2017 to the end of June 2018, when the exchange rate was Rs121 per dollar, the report said.
Growth in tax collection weakened from a robust 16.4pc in the first half of FY18 to only 2.7pc a year later. The Federal Board of Revenue targets tax collection equal to only 11.6pc of GDP in FY19, taking into account reduced sales taxes on major petroleum products, drag on the collection of withholding tax from contracts, contraction in general sales tax revenue as imports slow, and the overall slowdown in the economy, the bank said.
Lower growth in industry mirrored weaker growth in large-scale manufacturing, which is almost half of the sector, from 5.4pc in FY17 to 5pc, as well as a slowdown in construction despite a strong revival in mining and quarrying.
Growth in services decelerated from 6.5pc in FY17 to 5.8pc last year. Growth in agriculture accelerated, by contrast, from 2.1pc in FY17 to 3.7pc on an uptick in minor crops and cotton ginning. On the demand side, growth in private consumption, which provides on average 81pc of GDP and was the largest contributor to growth in FY18, found support in low inflation and interest rates.
Fixed investment in FY18 reflected higher public investment in infrastructure and energy, especially under the China–Pakistan Economic Corridor (CPEC) project, including electric power projects.
Net exports weighed on growth as imports grew considerably faster than exports to meet rising demand for oil and capital products, notably to support infrastructure projects.
Remittances are expected to revive, having already risen by 10pc in the first seven months of FY19 over the same period of FY18, as the Pakistan rupee depreciate further, economic activity in the Middle-eastern oil exporting countries (major destination of Pakistani migrants) holds broadly steady, and the government takes measures to facilitate remittances through official channels.