ADB's Economic Outlook

The Asian Development Bank (ADB), like other multilateral financial institutions, makes occasional assessment about the state of the health of various economies in the region. In its latest Outlook released on 6th April 2006, the ADB has projected an encouraging picture of the South Asian economies and expects an average increase of 7.3 percent in growth in 2007.
India's growth rate which averaged more than 8 percent over the last three years is projected to be somewhat lower at 7.6 percent in 2006 and 7.8 percent in 2007 as consumption and investment is slightly held back by price adjustments to reduce domestic petroleum subsidies and higher interest rates.
The GDP growth in Bangladesh has been forecast at 6.5 percent in 2006, reflecting a steady increase in domestic and external demand, with moderation to 6 percent in 2007. In Nepal, GDP growth rate is likely to slow down to 2 percent in 2006 but may pick up to 3.4 percent in 2007. The slower growth estimated by ADB is due to poor weather conditions affecting various crops, disruption caused by insurgency and downturn in tourism.
Pakistan's economy grew by 8.4 percent in 2005, the fastest rate of growth in the last two decades, but inflation and current account that slipped from surplus to deficit emerged as big challenges for Islamabad. GDP growth rate is likely to dip to 6.5 percent in 2006 but could rise to 7.3 percent in 2007. According to the ADB, Pakistan's medium term Outlook is favourable for growth which is likely to be in the range of 6 to 8 percent, assuming continued robust performance in economic management, greater investment to ease infrastructure bottlenecks, continued security and political stability.
The Outlook adds that tightening of monetary policy was expected to bring inflation rate down to 8.5 percent this year and to 7.6 percent in 2007.
The fact that South Asian economies are growing at a rapid pace and are likely to maintain similar trends is a very welcome development. Lack of investment, inept policies and shackles imposed by large bureaucracies had severely restricted their potential for growth and increased poverty and unemployment in the past.
A higher level of growth ranging between 7 and 8 percent together with reduction in population growth rates and a fair and equitable tax regime would definitely raise the standards of living of a vast majority of the population in these countries. Such a trend would also improve the chances of closing the income gap between rich and poor countries of the world over time. Therefore, there is a dire need to maintain the reform momentum in the South Asian economies and integrate them economically with the rest of the world.
The favourable developments in the region would definitely have a positive effect on the economy of Pakistan. It is to be appreciated that the government authorities in South Asia are trying to increase intra-regional trade to exploit their potential through various devices including settlement of political disputes. The economy of Pakistan as projected by ADB is also poised to grow at a fairly rapid rate, which is a very good sign. However, according to the latest reports, the growth rate during FY06 may turn out to be somewhat lower than 6.5 percent estimated by the ADB (initial government target was 7 percent) owing to substantial shortfall in the agricultural output. The wheat crop, in particular, is probably not going to be very good as expected earlier.
The government, of course, cannot do anything about this negative development, particularly at this late stage but must, in our view, pay serious attention to the ADB's observations on current account deficit and inflation that have been termed as big challenges. The current account deficit could be financed by issuance of sovereign bonds and through privatisation proceeds in the short run but this is not a sustainable position.
So far as inflation is concerned, government must understand that figures dished out on a weekly or monthly basis and called as satisfactory due to their somewhat softening trend do not provide any solace to the common man. During the last year and a half, the average consumer has seen a steep rise in the prices of essential items. For the poor and the lower middle income-groups, items like meat and fruits have been luxuries for a long time but now necessities like milk, sugar, pulses and vegetables are gradually getting out of reach.
The answer to contain overall inflation and stabilise the prices of various items is to enhance their production through suitable policy incentives and follow a strict fiscal and monetary regime. The proponents of an expansionary monetary and fiscal stance generally forget its inflationary impact in a country like Pakistan where for a large segment of the population, the basic economic issue is relating to prices due to low-income levels and the absence of the concept of a welfare state.