ADB projects Pakistan’s GDP to rebound to 2pc in FY2021 as COVID impact subside

The Asian Development Bank (ADB) in an update of its Asian Development Outlook (ADO) 2020 report has forecasted broad economic recovery for Pakistan in FY2021, with GDP growth estimated to rebound to 2.0 percent.

The projected GDP growth is lower than forecast in ADO 2020. As per the latest forecast, the ADB assumes that the COVID-19 impact will subside by the end of 2020—the end of the second quarter of FY2021—allowing global conditions to normalize and economic sentiment to improve.

The report also assumes the resumption of structural reform under an ongoing IMF Extended Fund Facility program to address macroeconomic imbalances. The government has proposed detailed economic stimulation measures in its FY2021 budget. In addition to reallocating Rs7 billion from the Federal Public Sector Development Programme budget to COVID-19 response, the proposed budget raises allocations for initiatives that provide social protection to the disadvantaged.

ADB was of the view that the flagship Ehsaas program will be scaled up from Rs190 billion in FY2020, or 2.3pc of government expenditure, to Rs230 billion in FY2021, or 2.6pc.

Pakistan Supply-Side

On the supply side, ADB expects that the agriculture sector would continue to lend impetus to GDP growth. Growth in the industry is forecast to improve in FY2021, led predominantly by construction and small-scale manufacturing.

ADB said that in addition to the normalization of global economic conditions, improved market sentiment, and stronger business and consumer confidence expected with the easing of the COVID-19 pandemic by the end of the first half of FY2021, a relatively low policy rate should facilitate the financing of industrial initiatives.

Spurred by improved growth in agriculture and industry, coupled with an expected improvement in domestic demand overall, services should also contribute to growth in FY2021.

Fiscal Side

On the fiscal side, the fiscal deficit is forecast to decline to the equivalent of 7.0pc of GDP in FY2021. Revenue is projected to increase, reflecting ambitious revenue-mobilization targets following initiatives to withdraw tax exemptions, rationalize tax concessions, and broaden the tax base.

ADP expects Pakistan’s fiscal expenditure to increase only slightly as the anticipated curtailment of some current expenditures such as subsidies somewhat compensates for higher development and social sector spending, which will continue to rise to support growth and economic recovery.

The current account deficit is anticipated to remain contained at the equivalent of 2.4% of GDP in FY2021, unchanged from the ADO 2020 forecast.

Exports & Imports

Exports are expected to grow in FY2021 with the likely pickup in economic activity in Pakistan’s major trade partners.

Imports too will rebound from a low base in FY2020 and, more importantly, in response to economic recovery in FY2021—and despite higher tariffs on imports of nonessential goods.

Remittances

Remittances should continue to cushion the current account deficit but will likely be lower than in FY2020 with the layoff of Pakistani workers overseas, in particular in the Persian Gulf, as economic activity remains soft globally.

BoP position

Continued improvement is anticipated in the balance of payments and foreign reserve position in FY2021. This prospect owes to a flexible, market-determined exchange rate regime adopted in early 2019, which significantly improved the

FY2020 external position; the anticipated containment of fiscal and current account deficits; debt service suspension granted by the Group of 20; and increasing foreign direct investment. Pakistan’s public debt is expected to revert to a downward trajectory as the IMF stabilization program improves prospects for fiscal consolidation, and assuming rapid economic recovery from the COVID-19 shock.

Inflation

The inflation rate is projected to drop to 7.5pc in FY2021, lower than the April forecast in ADO 2020 driven by the expected economic recovery, “but tempered by expenditure reform, and the government’s decision to stop borrowing from the central bank, which should help slow growth in the money supply to 14.2pc in FY2021.”

ADB said that an upside risk to the inflation forecast is global oil prices rising higher than currently projected in FY2021. A greater risk would be electricity tariff increases currently under consideration to improve cost recovery in the industry and help bring down government subsidies.