The revival of higher growth is predicated on the continued improvement in the domestic security situation, which is critically important to foster both domestic and foreign investment. And to strengthen private sector participation in the key sectors of the Pakistan economy, said the Asian Development Outlook 2009 (Update), released by the Asian Development Bank.
According to the ADO-2009, Pakistan's economic outlook in FY2010 will be shaped by both internal policies and global economic developments. Internally, the economic outcome will depend on the Government's ability to achieve the desired balance between fiscal consolidation and the revival of growth. Externally, the outlook will depend on the degree of improvement in the major trading partners; the consequent impact on Pakistan's exports and on the receipts of workers' remittances; and developments in global oil prices.
On balance, a modest revival in economic growth, to about 3.0%, is projected for FY2010, predicated on the planned larger public expenditure program, announced in June 2009, in the budget for FY2010 and on some easing of monetary policy. Agriculture is expected to continue its strong growth on the back of higher procurement prices for the main crops and increased public spending in the sector as announced in the budget. But agricultural growth will not be as high as in FY2009 due to the high base effect and continued water scarcity that will limit crop expansion.
Growth in the industry is expected to turn marginally positive in FY2010 as the commissioning of new power plants would reduce electricity outages, and as adjustments in power tariffs generate cash flow for the power companies to expand their operations. The pace of growth in the main exporting industrial sub-sectors, such as textiles, will depend on the extent of a pickup in consumer spending in the main trading partners. The services sector is expected to post moderate growth in FY2010 on the back of good agricultural growth and the modest pickup in the industry.
To fuel expansion, the Government has set a fiscal deficit target of 4.9% of GDP in the budget for FY2010, a level higher than the 3.4% of GDP originally targeted under the SBA. Of the new fiscal deficit target, up to 1.2% of the GDP of additional financing is expected to be made available under the pledges made by the donors at the Friends of Democratic Pakistan meeting in Tokyo in April 2009. This pledged assistance is to provide the fiscal space necessary for implementing a countercyclical response, in the form of higher development spending to address the problem of weak growth.
Consequently, a massive 54% hike is planned for the PSDP in FY2010. (Under an augmentation of the SBA, approved by the IMF Board on 7 August 2009, the Fund has agreed to provide bridge financing of up to 0.8% of the GDP to support the budget in case of delays in the receipt of funds pledged at Tokyo.) The Government in FY2010 also plans additional spending of 0.3% of the GDP, funded by donor grants to support the rehabilitation of internally displaced people in areas affected by operations against militants, ADO-2009 added.
According to ADO-2009, the large planned development expenditure overshadows the real contraction in current spending envisaged in the budget and results in an overall expansionary fiscal stance.
On the revenue side, ADO-2009 stated that the budget proposals project a modest effort to generate additional tax revenue. Development expenditure is projected to increase by 1.6 percentage points of the GDP in FY2010, while additional receipts to be raised by the Federal Board of Revenue amount to 0.4 percentage points of the GDP. The external resource requirement in the budget is therefore large and equivalent to about 80% of the planned PSDP, indicating an unsustainable dependence on foreign inflows. A failure to obtain external resources at the planned level could consequently lead, once more, to a sharp drop in development spending.
ADO-2009 observed that increases in the consumer price index have shown a trend to decline to 11.2% in July 2009, year on year. The anticipated robust agricultural crops, the economic program's demand management policies, and a high base effect from the previous year are factors expected to lead to a further moderation in inflation in FY2010. Conversely, planned increases in electricity tariffs and government wages, announced in the budget, will provide some upward pressure. On balance, inflation is projected to average 10% in FY2010, falling to about 9% (year on year) by June 2010.
Lower domestic inflation and continued nominal depreciation of the exchange rate are expected to help sustain export competitiveness. While some stabilisation in exports is seen, they are projected to contract by 2.5% owing to subdued demand in trading partner countries and continued structural bottlenecks, such as power shortages and lack of product diversification. Imports are expected to continue shrinking (by about 2%), although that pace will slacken as the economy recovers modestly and as international oil prices increase. The trade deficit will narrow marginally from a year earlier.
The services account is projected to improve, mainly reflecting higher logistics payments. It is uncertain whether the trend of increase in workers' remittances will be sustained. However, based on the continued strong growth of workers, of 25% in the first 2 months of FY2010, and evidence of strong numbers of workers proceeding abroad for employment, workers' remittances are assumed to hold steady in FY2010. The current account deficit is expected to be 4.8% of GDP in FY2010, somewhat improved from a year earlier.
As non-debt-creating inflows in the form of new foreign direct and portfolio investment remain little improved in FY2010, the financing of the current account deficit will need to continue relying on debt-creating inflows. These will include financing through the IMF's SBA, augmented by disbursements from development partners.
The economic outlook carries downside risks and challenges; ADO-2009 added and mentioned that although Pakistan's economic imbalances were reduced in FY2010, structural improvements in the underlying fundamentals are needed, without which it will be difficult to sustain financial stability and growth.
In particular, fiscal sustainability requires critical measures to improve revenue mobilisation through broadening the tax base and removing exemptions, improving tax policy and administration, and quickly adopting a fully-fledged value-added tax. Meeting the fiscal deficit target, purely by cutting development expenditure is not a desirable policy option for a country that requires large-scale spending on infrastructure and social sectors to sustain growth and reduce poverty.
Likewise, improvement in the current account through a contraction in imports alone is unsustainable. The current account will be fundamentally improved only when the Government pushes through with effective measures to build a much larger export base that is sufficient to finance oil, machinery, and other essential imports. This issue is crucial in an era of rising global oil prices, ADO-2009 added.
Pakistan's growth prospects continue to be stymied by its lingering power crisis. Both immediate and long-term measures are required to address the power crisis, including improving governance, reducing leakages and losses; rationalising electricity tariffs to cover sector costs and eliminating subsidies; and resolving the problem of "circular debt" (arrears that have developed among participants in the sector), which has drained the finances of the power companies and has forced cuts in their operations and investments.
Multilateral development partners are supporting power sector reforms and are financing critical investments to improve and augment electricity transmission, distribution, and generation systems.
However, the size and effectiveness of this assistance will depend on the Government's ability to implement its reform agenda. Global recession, if prolonged, poses an obvious risk to Pakistan's economic recovery and stabilisation through weakening exports, workers' remittances, and inflows of private capital. It is critical that the pledges made by donors in Tokyo are realised to finance the PSDP in support of Pakistan's growth and poverty reduction strategy.
Finally, ADO-2009 observed, revival of higher growth is predicated on continued improvement in the domestic security situation, which is critically important to foster both domestic and foreign investment and to strengthen private sector participation in key sectors of the economy.
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