The Asian Development Bank (ADB) has projected that Pakistan's Gross Domestic Product (GDP) growth would remain at 6 to 6.5 percent by the end this fiscal year. However, the growing imbalance in the external sector is a risk to economic growth and poverty reduction efforts.
The Bank cautioned that the budget deficit was expected to surpass the target of 3.8 percent and touch 4.2 percent of GDP, while with robust economic growth and a sharp increase in imports, the target for revenues was also likely to be surpassed.
"Continued policy action would be required to deal with the external imbalance and monetary overhang. In the longer run, levels of investment in the economy need to be enhanced to facilitate growth and poverty reduction efforts."
The 'Pakistan Economic Update (July-March 2005-06)', prepared by Pakistan Resident Mission (PRM) of ADB gives analysis of economic trends and presents an outlook of the economy for the whole year, which is encouraging.
It says that the growth in agriculture sector is expected to be sluggish due to the below target production of cotton and sugarcane crops along with poor growth of the livestock sub-sector. However, the large-scale manufacturing sector is projected to grow at a robust rate of 10.0 percent, as indicated by the sharp increase in imports of raw materials and rapid growth in private sector credit. In the services sector, telecom services, banking and trade are expected to sustain high growth in 2005-06.
Imports are projected to increase by 30.0 percent, because of high oil prices and continued strong domestic demand. The end of the quota regime since January 2005 and the robust growth in world trade will boost exports, which are expected to increase by 14.0 percent. The trade deficit is projected to increase to over $8.0 billion, and the current account deficit to $6.0-6.5 billion.
ADB Country Director Peter Fedon said: "The medium-term outlook for the economy looks good and although economic growth decelerated in the first half of 2005-06 the economy is expected to still post robust growth for the full year."
The 'Update' notes the significant recent decline in poverty as estimated by the government. The government continued to pursue an expansionary fiscal policy and the fiscal deficit increased.
The increase in government spending was mainly due to a sharp increase in development expenditure and payments for relief operations for victims of the October 2005 earthquake.
The 'Update' further notes that the annualised overall inflation declined by one percentage point to 8.3 percent in the first ten months of 2005-06. External trade continued to expand rapidly in the first three quarters of 2005-06, with imports increasing by 43.2 percent and exports by 18.6 percent.
The growth of imports was led by petroleum and petroleum products, which together increased by 64.5 percent to $4.6 billion. Textile and clothing was the largest contributor to export growth.
There was an almost three-fold increase in foreign direct investment, partly because of higher privatisation proceeds. The foreign exchange reserves held by SBP increased by $477 million to $10.3 billion, which are sufficient to finance 4.2 months of projected imports in the current year.
The deficit in the current account of the balance of payments almost quadrupled to $4.7 billion in the first three quarters of 2005/06, as imports grew rapidly. The increase in the current account deficit was largely offset by a sharp turnaround in the financial account.
It says that Pakistan's external debt declined by $589 million to $35.2 billion in the first half of 2005/6. In March 2006, the Government issued sovereign bonds for $500 million with tenures of 10 and 30 years. The bonds were heavily oversubscribed.
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