Asian Development Bank (ADB) has revised GDP growth forecast for Pakistan upward to 5.2 percent against the initial forecast of 4.8 percent for fiscal year 2017 while GDP growth for India is forecast at 7.8 percent. The upgrade in Pakistan''s growth is based on the assumption that there would be further improvements in energy supply and security, and likely recovery in cotton and other agriculture crops.
The ADB report, "Asian Development Outlook (ADO-2016) Update", states that key challenges for Pakistan remain, regarding governance and security issues, reviving agriculture and improving its productivity, increasing exports and attracting investment, strengthening public enterprises, and improving the business and regulatory environment. In contrast ADO maintains that "India''s economy will remain on a strong growth path this fiscal year and next, aided by implementation of key structural reforms, a robust consumer demand, and a higher agricultural output driven by a good summer monsoon."
Growth in Pakistan will outperform the ADO 2016 projection for 2017 on improvements in energy supply, higher infrastructure investment in the economic corridor projects, and a better security environment. Pakistan''s modest current account deficit at 0.9 percent of GDP in 2016 is revised higher to 1.6 percent in 2017 on stepped up investment spending in its economic corridor project with China and a stronger growth.
Risks to the economic outlook in Pakistan in the short term are unexpectedly high with increasing oil prices or a marked slowing of remittances. Further down the road, the end of the IMF programme could relax focus on monetary and fiscal discipline, especially with a parliamentary election scheduled for 2018, and distract attention from the structural reform agenda that is essential to maintaining sustainable and equitable growth, maintained in the ADO.
A major impetus to growth in fiscal year 2017 and beyond will be the implementation of $46 billion program of infrastructure spending on roads, railways, pipelines, and electric power in an economic corridor project linking Pakistan with the People''s Republic of China (PRC), which was announced in April 2015.
Fast-tracking will enable several energy projects to come on stream in fiscal year 2018. The planned reduction in the fiscal year 2017 budget deficit will further enhance funding for private sector credit and better enable it to meet rising domestic demand. As such-and assuming further improvement in energy supply and security, and likely recovery in cotton and other agriculture-the growth forecast for fiscal year 2017 is revised up to 5.2 percent.
The report states that the Pakistan government significantly strengthened macroeconomic fundamentals and advanced a comprehensive program of structural reform under a 3-year program with the IMF that ended in September 2016. Inflation has been squashed to the low single digits, foreign reserves rebuilt, and the budget deficit markedly reduced.
For India the ADO notes that inflation, meanwhile, is expected to average 5.4% in FY2016 with food prices benefiting from a stronger monsoon. Inflationary pressures, though, will move up in FY2017, with the rate seen at 5.8%, against a backdrop of higher global commodity prices and an expected rise in the prices of some services following the introduction of GST.
Tax reform was launched in Pakistan to improve revenue performance, and a substantial progress achieved toward restructuring the power sector. The general government budget for fiscal year 2017 projects a further reduction in the deficit to 3.8 percent of GDP achieved by adopting new revenue measures and streamlining current expenditure.
Tax revenues in Pakistan are projected to increase by half a percentage point, raising the ratio of tax to GDP to 12.8 percent by eliminating more tax concessions and exemptions, expanding the withholding system as part of administrative reform to widen the tax base, and raising some excise taxes and customs duties. Including non-tax and provincial tax revenue, total budgeted revenue amounts to 15.8 percent of GDP. Current expenditure is to be held to 15.8 percent of GDP, mainly by economising on non-critical spending and further reducing energy subsidies, to allow the public sector development program to expand by 18.4 percent. Inflation is now expected to average 4.7 percent in fiscal year 2017.
With respect to India the updated assessment notes some risks of slippage in the government''s target to reduce the fiscal deficit to 3.5% of GDP for FY2016 due to subdued non-tax revenue and higher current expenditure. However, measures to improve the targeting of subsidies and tax revenue growth should reduce the extent of slippage. A healthy external balance and strong capital inflows have helped the Indian rupee remain relatively stable against the US dollar in 2016.
The upward revision takes into account expected oil price rises and a stronger domestic demand in an increasingly supply constrained economy. It is tempered by the prospect of a broad agricultural recovery and only modestly higher global food prices. The July 2016 Monetary Policy Statement covering the first 2 months of fiscal year 2017 kept policy rates unchanged as the central bank continues its cautious forward-looking approach, expecting to hold inflation within the range of 4.5%-5.5%.
The current account deficit is expected to widen in fiscal year 2017 to about $5 billion, or 1.6 percent of GDP, which is higher than forecast in March. The revision reflects a somewhat greater increase in global oil prices than expected and continued expansion in other imports stemming from faster economic growth. Exports are expected to perform better during the year, increasing by nearly 5% as a recovery in cotton production underpins an upturn in textile sales, and as global prices for non-oil commodities reverse from a sharp decline to a modest increase.
Total exports for Pakistan are not expected to recover to the fiscal year 2014 level, however, a little if any improvement in global demand is expected, forestalling any major boost for food or manufacture exports. In contrast for India the ADO notes that an uptick in demand from advanced economies, including oil producers supported by higher commodity prices, will boost exports, which after 2 years of contraction are seen expanding 4% in FY2016 and 7% in FY2017.
Construction cutbacks in the Gulf, where most Pakistani overseas workers are employed, will slow growth in remittances. However, remittances will likely be sufficient to hold in check deficits in trade and other payments in the current account. Update for India expects the economy to benefit from the flow through impacts of ongoing reforms, including the approval in August 2016 of a legislation to allow the introduction of a long-awaited uniform goods and services tax. This landmark legislation is expected to boost GDP growth and revenue for the government. The effects of a healthier monsoon season, after 2 years of weak rains, will spur growth and government approval of a pay hike for public servants last August will continue to fuel buoyant consumption, which will remain a key growth driver. Construction, meanwhile, will benefit from the government announcement of measures to ease rules for quicker settlement of housing disputes, and to clear the way for fresh liquidity injections into stalled projects.
The mobilisation of larger inflows into the capital and financial accounts has been central to Pakistan''s 3-year economic program with the IMF, and these flows are projected to increase to $6.5 billion in fiscal year 2017, mainly with more foreign direct investment and continuing sizeable official flows. Thus, even with the projected widening of the current account deficit, the overall balance should remain in surplus, augmenting official reserves.
The corridor project with the PRC is expected to attract more foreign direct investment, and already in 2015 investors announced 40 green field projects worth a remarkable $19 billion, or 4 times the norm in recent years. Although implementation will extend over several years, the large increase signalled the catalytic effect of the corridor project and success in making Pakistan a stable destination attractive to foreign investment. Moreover, the decision by Morgan Stanley Capital International to put Pakistan in its MSCI emerging market index, effective from May 2017, will likely spur equity portfolio inflows.
The report states that growth accelerated in fiscal year 2016 on the cumulative impact of the government''s macroeconomic and structural reform programme, sharply lower oil prices, and improved security, outpacing the ADO 2016 forecast despite a major crop failure.
Updated assessment preliminary estimates put GDP growth at 4.7 percent in fiscal year 2016, up from 4.0 percent in fiscal year 2015 and higher than the 4.5 percent projected in ADO 2016.
Interest rates pose less risk to India and Pakistan, where public debt is held mostly by domestic investors. However, where a significant share of such debt is short term, as in Pakistan, rollover risks are high and debt dynamics remain vulnerable to shocks. From 2000 to 2015, disasters such as floods and storms caused losses from damage to property, crops, and livestock totalling $21 billion in Pakistan.
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