ISLAMABAD, Oct 4: The Asian Development Bank (ADB) on Tuesday reduced Pakistan’s economic growth forecast to 6.5 per cent owing to higher deficits on fiscal, trade and current account fronts and lower than targeted cotton output during the current fiscal year (2005-06).

In its quarterly Pakistan Economic Outlook, the bank projected trade deficit widening to about $5.8 billion and a negative impact of high oil prices, necessitating revisions in the major economic targets for the year 2005-06.

“If oil prices continue to remain at the current record high level, or rise further, projections for imports, the fiscal deficit and inflation may have to be revised upward,” it said. High oil prices could also adversely affect the global economy, resulting in lower growth of Pakistan’s exports.

“The economy is projected to grow by 6.5 per cent in fiscal year 2006,” the bank said against government’s projections of seven per cent rate of GDP growth.

After growing at a very high rates in the last two years, the manufacturing sector is projected to settle down to a more sustainable, but still robust, growth of about 11 per cent in fiscal 2006.

Substantial production capacity built in the last two years will come on line during the year and exemption of major export industries from GST will also boost production.

Agricultural growth is also likely to decline in 2006, mainly because of the high base effect, it adds. “It will be difficult to sustain the last year’s all time high output of cotton because of heavier monsoon rains and greater moisture that increase crop vulnerability to pests.

The growth of the agriculture sector is projected at about three per cent in fiscal year 2006. The government had projected a 4.8 per cent growth in agriculture sector during the current year. In the services sector, the rapid growth of telecom services, banking and trade is likely to sustain in 2006.

The ADB said the tightening of monetary policy since last quarter of 2005 and opening up of imports of essential items will dampen inflationary pressures in 2006. However, expansionary fiscal policy, continued high oil prices and the large monetary overhang may make it difficult to reduce inflation significantly. Hence inflation has projected to decline only marginally to 8.5 per cent in 2006, compared with a government target of eight per cent.

With high GDP growth, projected double-digit increase in imports and ongoing improvements in tax administration, tax revenues are projected to grow by 17 per cent in 2006. “However, large increases planned in development expenditure and salaries and pensions of government servants, will contribute to a higher fiscal deficit in 2006,” the ADB said.

Imports are projected to grow at a double-digit rate of about 18 per cent in 2006 because of continuing high GDP growth rate and high oil prices. Exports are expected to benefit from liberal incentives for export industries announced in the budget, the textile industry’s restructuring and modernization and the ending of textile quotas since January 2005.

“However, because of the expected slow down of the global economy, export growth will decelerate to about 15 per cent and the trade deficit will widen to about $5.8 billion,” the bank said. This, along with expected increase in the deficit on the services account, will result in an increase in the current deficit to about 2.8 per cent of GDP.

With sound macroeconomic fundamentals, pick-up in private investment and expanding development expenditure, medium-term prospects for the Pakistan economy look good.

Improved relations with India and possible increase in bilateral trade will also boost growth in the medium term.

Reduction of external security concerns in the region is also likely to promote foreign investment. This for medium term, it is projected that the high economic growth will be sustained, inflation will come down, the fiscal deficit will remain below four per cent of GDP and the current account deficit will be in the range of 2.5-3 per cent of GDP.