Quarterly update on economy: ADB for ending political uncertainty

The latest ADB''s update makes urgent call for ending political uncertainty, to ensure the present economic growth. In its latest Quarterly Update on Economy, the ADB has listed a number of positive developments on the economic front and spoken of some bottlenecks like upcoming power shortages.
But it stresses that "the fundamental issue is a resolution of the current political uncertainties. The forthcoming presidential and parliamentary elections must be seen by the population as fair and need to ensure the continuity and coherence of economic policy so as to sustain economic and governance reforms". The update sees that economy would continue the growth momentum achieving 6.5 percent by June 2008. This showed slight deceleration, because of tightening of the monetary policy to contain consumer demand, high international prices, and continued slow growth in exports.
In its introductory remarks, the update states that robust and broad based growth marked FY2007 (ended June 2007). Vigorous domestic demand was the catalyst, but it also induced inflation pressures. Monetary policy was tightened while fiscal policy remained expansionary, and a key challenge will be to align the two policies more closely. Encouraging revenue performance helped keep the fiscal deficit unchanged relative to GDP, although the trade and current account deficits widened, financed by strong external inflows. A concern is that these inflows could slow or reverse. The present momentum is expected to continue in FY 2008, moderated by the impact of tight monetary policy conditions, high international oil prices, and slow export growth.
According to the report the overall inflation in FY2008 is expected to subside to 6.5 percent. However, if the government borrows more from the banking system to finance higher than budgeted expenditures resulting in a wider than planned deficit, or if external inflows are unexpectedly strong, SBP will likely find it difficult to offset the impact on the money supply and ultimately inflation.
The government is to continue its expansionary fiscal policy in FY2008 as announced in the June budget, with an increase in salaries and pensions of government employees, larger subsidies, and a 20 percent hike in development spending. Expenditure on earthquake areas will continue, and relief and rehabilitation of districts in Sindh and Balochistan, badly affected by the recent rains and floods, will add to public spending. Servicing the domestic debt will also remain at high levels. The central board of revenue (CBR) expects receipts to stay robust, and the government has set a 21 percent improvement target in revenue collection for FY2008. Taking these factors into account, the update forecasts the fiscal deficit to be 4.2 percent of GDP in FY2008, slightly above the government budget plan of 4.0 percent.
On the external side, relatively slow growth in exports is projected because of continuing weakness in textiles, while import growth is expected to be elevated, reflecting a larger oil bill and continued robust expansion in investment. Accordingly, the trade deficit is likely to remain heavy at 11.4 billion dollars or 7.1 percent of GDP. While the net services and income deficits will continue to widen, workers'' remittances, targeted to reach 6.2 billion dollars, should hold the current account deficit to 8.8 billion dollars, or 5.5 percent of GDP, in FY2008. This level is well beyond the ADO 2007 estimate of 3.9 percent of GDP.
Overall, Pakistan''s growth over the 4-year period FY2003-2007 has averaged an impressive 7.5 percent, and this rate could be sustained in the medium term if two conditions are met: macroeconomic fundamentals remain strong, and policy commitment to governance and economic reform continues. Also, despite recent improvements, the still-low investment and savings rates represent a constraint to achieving and maintaining high growth, and that has to be addressed.
The lack of industrial and export diversification has to be rectified, to bring down persistent growth in the current account deficits to levels consistent with sustainable financing.
As a matter of some urgency, ongoing power shortages, which could become a bottleneck to growth, need to be resolved. Yet the fundamental issue is a resolution of the current political uncertainties. The forthcoming presidential and parliamentary elections must be seen by the population as fair, and need to ensure the continuity and coherence of economic policy, so as to sustain economic and governance reforms.