In its Asian Development Outlook (ADO) 2006 Update, issued on 6th September, the Asian Development Bank (ADB) has reduced the economic growth forecast for Pakistan in FY2006-07 to seven percent, 30 basis points below its own yearly forecast in April 2006.
Interestingly, the latest ADB forecast corresponds exactly to the target of seven percent fixed by the government, though somewhat lower than the earlier forecast, is still quite respectable. Assuming normal weather conditions, agriculture is projected to grow by 4.5 percent in 2006-07.
Substantial public sector investment in irrigation and a sharp increase in the import of agricultural machinery in the last few years would also help in raising agricultural productivity.
Growth in industry is expected to rebound to 9.1 percent due to new investments, especially in the textile, cement and fertiliser sub-sectors. In services, heavy foreign investment in telecom in recent years will help the sub-sector maintain a fast momentum during the year.
"Grey" areas pinpointed by the ADB include the increase in the current account deficit of the country and higher fiscal deficit. The current account deficit is projected to touch 7.9 billion dollars or 5.5 percent of GDP. The fiscal deficit targeted by the government at 4.2 percent of GDP, including 0.6 percent for earthquake related expenditure, is likely to increase to 5.0 percent of GDP.
While extension of the tax net to real estate transactions and higher tax rates on some financial services may increase revenue receipts, current expenditures may exceed the target due to likely overrun in defence expenditures on account of ongoing operations against militants and greater domestic debt servicing. Inflation is expected to decline to an average of 6.5 percent, but this moderation depends crucially on central bank's implementing a tighter monetary policy to keep domestic demand in check.
The ADB's assessment of Pakistan's economy, we feel, is quite objective. It is encouraging to note that the GDP growth rate is expected to improve to seven percent from 6.6 percent last year, with the result that per capita income will again improve by a considerable margin.
Although there has been much debate in the country about the impact of increased growth rate on reducing poverty, it is quite evident that chances of alleviating poverty or unemployment are much less when the economy is stagnant or shrinking. A large majority of the population will ultimately gain something when the size of the pie is greater.
However, the ADB document confirms once again the downside domestic and external risks to the economy. The latest data on trade and current account balance indicate that the gap between foreign exchange receipts and payments of the country is widening. This should be a matter of great concern to the policy makers.
It needs to be stressed that foreign exchange reserves of the country are not enough to sustain continuous haemorrhage in the external sector and foreign currencies cannot be printed but have to be earned. Obviously, trade policies have to be redesigned to reverse the situation in the external sector and there is no shortage of relevant literature or policy advice on the subject. Fiscal deficit is also increasing at a fast rate after witnessing a gradual decline in the last few years.
We are not against the increase in defence expenditures if necessitated by the circumstances, but it is equally important to raise revenues correspondingly and prepare the nation for a necessary policy shift. Some good news on the inflation front are certainly welcome. However, it needs to be stressed that the State Bank must continue to follow a tight monetary policy in order to achieve the all-important objective of inflation containment.
The recent raise in discount rate and upward adjustment in banks' cash reserve requirements and statutory liquidity requirement ratio were certainly meant to contain liquidity expansion and reduce inflationary pressures in the economy, and we hope that the State Bank will not hesitate from making more of such unpopular decisions in future if the situation so demands.