Pakistan's Inflation rate is expected to remain at 10 percent, reflecting likely budget spillovers while continued strong growth in remittances is expected to rein in the current account deficit to equal 1.3 percent of GDP, an Asian Development Bank (ADB) report says.
The report, titled as 'Asian Development Outlook 2012 Update,' says improving Pakistan's economic performance depends on taking difficult steps to address structural problems. Breaking out of recent doldrums crucially depends on the power sector becoming a reliable supplier of electricity so that there is incentive to substantially increase private investment. Most important for the breakout is to fundamentally improve the country's fiscal position by both eliminating subsidies and the drain on public finances imposed by loss-making state-owned enterprises, and to broaden the tax base to raise one of the lowest tax participation rates in the region, promote equity, and provide the revenues needed to fund necessary government functions.
The report says that the economy recovered modestly from severe floods a year earlier to grow by 3.7 percent in FY2012 (ended 30 June 2012). Agricultural growth picked up to 3.1 percent, markedly easing inflation. While the expansion of the service sector slowed slightly, its size meant it continued to account for most of GDP growth. Energy shortages intensified during the second half of the fiscal year, seriously crimping large-scale manufacturing, which expanded by only 1.2 percent. Unpredictable and severe load shedding is estimated to knock at least 2 percentage points of GDP growth annually. Investment declined for the fifth year in a row, dropping to 12.5 percent of GDP, compared with 22.5 percent in FY2007.
The country's sustained double-digit inflation reflects the government's heavy borrowing from the State Bank of Pakistan to finance large budgetary spending and excessive deficits. In FY 2012 the deficit was estimated at 8.5 percent of GDP, including government financing of power sector arrears. The current account deficit at $4.5 billion (2 percent of GDP), falling capital and financial inflows, and higher debt service payments drove official reserves down by $4.7 billion to $11.9 billion at the end of June 2012.
Macroeconomic imbalances and structural issues are expected to hold growth to 3.7 percent in FY2013, in line with the FY2012 outcome, as the energy shortage is expected to continue as a binding constraint throughout the year. According to the report, services' contribution to growth has been higher in South Asia than in other sub regions; in India, Maldives, Pakistan, and Sri Lanka, some 60 percent of the growth or more in 2000-2010 came from services. In Southeast Asia, particularly in Indonesia, Malaysia, the Philippines, and Singapore, services contributed over half of the growth in 2000-2010.
The report says that Pakistan's economy recovered from the FY2011 floods with better performance in agriculture, which eased food prices, and a marked pickup in construction, mainly reflecting the rehabilitation of flooded areas. Systemic power shortages remain a major issue, particularly in Bangladesh, India, Nepal, and Pakistan, adversely affecting business conditions and economic growth, while restricting investment activity and adding to inflationary pressures.
The report reveals that South Asia's overall external position is forecast to improve in 2012. Slower growth in the global economy has depressed merchandise exports. Imports are weakening at a similar pace while reflecting weaker investment and growth, as well as relatively stable global commodity prices but doing so from a larger base. Sustained strong inflows of remittances to Bangladesh, India, Nepal, Pakistan, and Sri Lanka, as well as recovering tourism receipts in Bhutan, Nepal, and Sri Lanka, will help to bolster current account balances in these economies.