Asian Development Bank (ADB) has projected GDP growth for Pakistan at 4.5 percent in fiscal year-2016, assuming continued macroeconomic stability, expected improvement in energy supply, and planned infrastructure investment tied to an economic corridor project linking Pakistan with China. Asian Development Outlook (ADO-2016) released by the Bank says that achieving high and sustainable growth has been a challenge for Pakistan.
Growth has been volatile, with periodic episodes of high growth followed by spells of low growth as economic reform is implemented only sporadically and incompletely. The GDP growth is expected to accelerate modestly to 4.5 percent in fiscal year 2016 and 4.8 percent in fiscal year 2017. Military operations in parts of the country have significantly curtailed the terror attacks that had hampered economic activity in recent years, maintained in the ADO.
Challenges that impede growth in Pakistan include weak infrastructure and transport connectivity and inadequate workforce skills, governance and institutions, service delivery and access to finance, ADO maintained. Persistence will be required to overcome longstanding structural impediments to investment and enable faster growth. Further implementation of structural reform will consolidate recent gains in macroeconomic stability and improve the investment climate amidst the improving security situation, especially in Karachi, the commercial hub of the country. Inflation is expected to average 3.2 percent in fiscal year 2016, reflecting lower global oil and commodity prices. In the first 8 months of the fiscal year, inflation has averaged only 2.5 percent with food inflation at 1.5 percent and other inflation at 3.2 percent.
Tax adjustments on some imports in December 2015 are expected; however, to push inflation up marginally in the remaining months of the fiscal year. Inflation is expected to pick up to 4.5 percent in fiscal year 2017, mainly because of a slight recovery expected in global oil prices, firmer prices for other international commodities, and somewhat higher domestic demand. The central bank stood by its accommodative monetary stance as inflation fell. In September, it reduced the policy rate, effective in October, by 50 basis points to 6 percent, the lowest in decades.
Growth in industry is expected to be driven by strong expansion in construction and continued moderate expansion in mining, utilities, and manufacturing. Growth in large-scale manufacturing accelerated to 3.9 percent in the first half of fiscal year 2016 from 2.7 percent in the same period of last year, supported by low prices for raw materials, improved gas and electricity supply, and expanded construction, as well as lower interest rates.
However, textile production, the largest segment, grew by only one percent during the first half and is expected to constrain overall growth in large-scale manufacturing this year, partly because of weaker demand in export markets and rising competition.
Agriculture is likely to continue to grow only moderately, as cotton output is projected to fall because of heavy rains in July 2015 and much lower global cotton prices. However, continued strong expansion in livestock, which accounts for over half of agricultural production, will partly offset reductions elsewhere.
Growth in services will be led largely by transport improvements and higher profits for financial services, though retail and wholesale trade should also benefit from improved industrial activity. Consumption will expand with low inflation, higher public sector salaries and pensions, and government employment schemes in the Auto Industry, but a slowdown in remittances and lower commodity prices are expected to retard growth in rural incomes and spending
Net exports will continue to be a drag on growth as exports falter and lower oil imports are offset by higher quantities of other imports. Net credit to the private sector expanded by Rs 310 billion during the first 7 months of fiscal year 2016 from Rs 164 billion in the same period of the previous year, reflecting monetary easing and capacity improvements.
The government borrowed heavily from commercial banks to finance the deficit and to retire its debt to the central bank. The fiscal year 2016 budget targets a lower fiscal deficit equal to 4.3 percent of GDP, to be achieved by both boosting revenue and containing expenditure.
Revenues are budgeted to increase by 17.6 percent and expenditure by 7 percent. Federal Board of Revenue tax collection during the first half of fiscal year 2016 fell below target partly because lower oil prices undercut import duty collection. To offset the revenue shortfall, the excise duty on cigarettes was increased and regulatory duties and additional customs duties were imposed on a variety of products, especially luxury goods, effective on 1 December 2015.
On the spending side, the government is selectively trimming current and capital spending, which includes absorbing the cost of the agricultural support package announced in September. Moreover, 11 percent of spending is earmarked for transport projects under the economic corridor project with the PRC. Budgetary spending on untargeted subsidies, including for electric power was reduced by a third over the past 3 years as the government raised power tariffs to bring them close to cost recovery.
Nevertheless, the past accumulation of inter-company arrears in the sector, or circular debt amounting to $3 billion at the end of June 2015, is a fiscal risk that will only worsen with any more build-up. The current account deficit in fiscal year 2016 is projected to remain low at one percent of GDP for a second year in a row as prices for oil and other commodities stay low and inflows continue under the Coalition Support Fund-despite declining exports and slowing growth in remittances.
The current account deficit fell to 1.2 percent of GDP during the first 7 months of fiscal year 2016 from 1.7 percent a year earlier as trade and services deficits narrowed. Import payments fell by 7 percent on divergent developments: food and petroleum products, which together account for about one-third of imports, fell by 32% because of high domestic wheat stocks and the drop in global oil prices.
Challenges for export growth are generally weak external demand, growth moderation in the PRC, Pakistan rupee appreciation against the euro, lost textile market share to new competitors, and unfavourable terms of trade for exports with little value added. Persistent rupee appreciation, by 20 percent in real terms over the past 2 years, has adversely affected export competitiveness. The rupee continued to be a relatively strong currency as the US dollar strengthened in the first half of fiscal year 2016, depreciating by only 2.8 percent to Rs 104.9 per dollar. Assuming some revival in prices for oil and other commodities, larger imports to support higher investment and growth, and some improvement in exports as factories enjoy better power supply, the current account deficit is projected to widen to 1.2 percent of GDP in fiscal year 2017.
Workers remittances expanded by only 6 percent in the first 7 months of fiscal year 2016, down from an average of 15 percent annually in the previous 6 years, the falloff likely reflecting reduced oil incomes in the Gulf, a major host region.
Inflows that do not create debt continued to be limited, as foreign direct investment increased only slightly to $624 million, with inflows mainly into electric power and oil and gas, while portfolio investment amounted to only $155 million. Limited public resources constrain investment in infrastructure for energy, transport, irrigation, and urban services. This impairs connectivity, raises the cost of doing business, restrains productivity, and blocks access to public services. Governance and institutional challenges across all sectors undermine effective public service delivery and obstruct private sector development. Operational losses incurred by many large public enterprises drain already meager public resources.
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