GDP growth rate to increase to four percent by 2010: Asian Development Bank Outlook 2009

Asian Development Bank (ADB) has projected Pakistans gross domestic product (GDP) growth rate in 2009 financial year to be 2.8 percent that would increase to four percent in 2010, said ADBs Country Director for Pakistan Rune Stroem here on Tuesday.
The GDP growth rate forecast by the ADB is not in sync with those agreed between the government of Pakistan and the International Monetary Fund (IMF) team in Dubai last month for 2009 fiscal year - 2.5 percent which will automatically have repercussions on ADB forecast of other macroeconomic indicators, including domestic revenue generation.
The ADB Country Director was talking to the media on the launching ceremony of "Asian Development Outlook 2009." He said that the ADB had projected Pakistans inflation rate for 2009 financial year at 20 percent. "This rate is 40 percent higher than the last years 12 percent. The inflation rate of Pakistan for 2010 is projected to be six percent that is 70 percent less than that in 2009," Stroem stated.
He said that the external debt and liabilities of Pakistan had increased by 58 percent of the GDP due to high fiscal and current account deficits as well as scarcity of non-debt creating inflows.
According to the ADB report, in Pakistan during 2008 financial year, a sharp deterioration in current account and escalating inflation led to a depletion of foreign exchange reserves. This, in turn, triggered a balance-of-payments crisis. The immediate threat to economic stability and the servicing of international debt obligations was overcome through a stabilisation programme backed by the International Monetary Fund.
During 2008 financial year (ended on 30 June 2008), the economic situation deteriorated significantly after five years of respectable growth that averaged around seven percent. Aggravated by unprecedented oil and food price shocks in 2008 financial year, though the economy started having problems attracting inflows, and its economic fundamentals worsened.
The resulting steep drawdown of reserves led policy makers to turn to the International Monetary Fund (IMF) for support for its stabilisation programme. The report states that growth dropped to 5.8 percent in 2008 financial year in Pakistan. Significant factors constraining growth have been the sharp decline in the growth of private investment resulting from political uncertainty, the worsening security situation, and the impact of high international oil prices and frequent power shortages.
The contribution of investment to growth fell to only 0.7 percentage points in 2008 financial year as compared to 2.7 percentage points in the preceding fiscal year. Yet the saving-investment gap (private sector deficit) widened, as a result of a decline in the saving-to-GDP ratio.
"The Asian Development Outlook 2009" states that subsidies on oil, food, fertiliser and power contributed to the budget deficit in Pakistan, but failed to contain inflation as food prices soared and the price of fuel was adjusted upward in the last four months of 2008 financial year.
The steep depreciation of the Pakistan rupee stoked inflation pressures. The consumer price index on a year-on-year basis climbed to 21.5 percent in June 2008 and to 25.3 percent in August-the highest in 30 years.
With declining international commodity prices and a slowing domestic economy, the year-on-year consumer price index fell to 20.5 percent and food inflation to 21.6 percent in January 2009 in Pakistan. Domestic inflation would have fallen by more had the Pakistan rupee not depreciated by 15.9 percent against the United States dollar in the first seven months of 2009 financial year.
According to the report, growth in 2009 financial year is estimated to slow to 2.8 percent due to the impact of the global slowdown, tight demand management policies, and the power deficit year. Growth in agriculture will improve with respect to that in the last fiscal, but will remain moderate on account of high input costs, including electricity, fertilisers and pesticides, and pest attacks. The sugarcane crop has been disappointing, and the cotton crop has been short of target. However, the wheat crop is projected to be very good on account of improved water availability and a 52 percent increase in the support price for farmers, announced in September 2008.
The report says that the energy shortages, the law and order situation and capacity and input constraints caused by higher import prices from the large depreciation of the Pakistan rupee, will lower industrial performance. Large-scale manufacturing shrank by 5.6 percent in the first five months of 2009 financial year.
The GDP growth is expected to improve to 4.0 percent in 2010 financial year. The expansion will come from greater stability in economic fundamentals, improved financial inflows resulting from gradual easing of global credit conditions that will help revive investment. The report maintains that the fiscal deficit is expected to decline in 2009 financial year, as the government removes or reduces subsidies, and rationalises development expenditure while in 2010 financial year, the fiscal deficit is projected to go down further to 3.4 percent of GDP as ongoing tax administration and policy reforms start to make themselves felt in greater generation of revenue and as expenditure is streamlined. The economy needs to develop infrastructure and invest in health and education. Deficit spending can be carried out judiciously, and it need not be inflationary because the economy is very far from full employment.
Inflation is projected to fall to an average of 6.0 percent in 2010 financial year. Imports would need to continue to compress significantly in the second half of 2009 financial year to improve the current account balance, especially as exports will be hit harder by recession in the main importing economies.
On these assumptions, the current account deficit is projected to go down to 6.0 percent of GDP in 2009 financial year. According to the report, the current account gap remains a major challenge in Pakistan that was exacerbated by the deterioration in the financial account in the seven months of 2009 financial year. The IMF will provide much-needed balance-of payments support over the next two years, but such support cannot indefinitely sustain a large external imbalance. This imbalance imposes a balance-of-payments constraint to sustainable growth in Pakistan:
The GDP growth rate of Pakistan for 2009 and 2010 is projected to be 2.8 percent and 4.0 percent respectively, while the GDP growth rate of India for 2009 and 2010 is projected to be 5.0 percent and 6.5 percent respectively. The average GDP growth rate of Pakistan for the last five years, (from 2004 financial to 2008 financial year) is recorded to be 6.9 percent while that of Indias is 8.5 percent.
The report says that the GDP and the sectoral growth are projected to slow down in 2009 financial year in Pakistan due to the global crisis, tighter demand management policies and energy deficit. Also the inflation is projected to remain high in the current fiscal due to reduction in subsidies, increase in wheat support price and the currency depreciation. "The Asian Development Outlook 2009" says that economic growth in developing Asia will slide to just 3.4 percent in 2009, down from 6.3 percent last year and 9.5 percent in 2007.