ISLAMABAD, Sept 17: The Asian Development Bank has revised its growth forecast for Pakistan’s economy, reducing it to 6.5 per cent from the targeted 7.2 per cent for the current fiscal year and said the country could also miss some other economic targets.
In its Asian Development Outlook 2007 Update released on Monday, the ADB said some key political questions along with economic constraints, including power shortages, needed to be resolved for sustainable GDP growth.
“The lack of industrial and export diversification has to be rectified, to bring down persistent growth in the current account deficits to levels consistent with sustainable financing,” it said.
“The fundamental issue is a resolution of the current political uncertainties,” said the ADO 2007 Update.
It insisted the forthcoming presidential and parliamentary elections should be “seen by the population as fair, and need to ensure continuity and coherence of economic policy, to sustain economic and governance reforms”.
The bank praised Pakistan’s growth that averaged an impressive 7.5 per cent over the four-year period (fiscal 2003-2007), and said the rate could be sustained in the medium term if macroeconomic fundamentals remained strong and policy commitment to governance and economic reforms continued.
“Also, despite recent improvements, the still-low investment and saving rates represent a constraint to achieving and maintaining high growth, and that has to be addressed.”
The bank said slow growth in Pakistan exports was projected because of continuing weakness in textiles, while import growth is expected to be elevated, reflecting a larger oil bill and continued robust expansion in investment. Accordingly, the trade deficit was “likely to remain heavy at $11.4 billion or 7.1 per cent of GDP”.
While the net services and income deficits would continue to widen, workers’ remittances, targeted to reach $6.2 billion, should hold the current account deficit to $8.8 billion or 5.5 per cent of GDP in fiscal 2008. The forecast was far more than the ADB’s March deficit forecast of 3.9 per cent of GDP.
The ADB said the servicing of domestic debt would remain at high levels.
The central board of revenue (CBR), however, expects receipts to remain robust and the government has set a 21 per cent improvement target in revenue collection.
Taking these factors into account, the ADB forecast the “fiscal deficit to be 4.2 per cent of GDP in fiscal year 2008, slightly above the government budget plan of 4.0 per cent”.
The bank said the inflation was expected to subside to targeted 6.5 per cent during the year but if the government borrowing increased for financing higher budget deficits or if external inflows were unexpectedly strong, the SBP would find it difficult to offset the impact on the money supply and ultimately inflation. The bank said the continuity of foreign inflows, including remittances, was not ensured and thus “raises questions about the deficit’s sustainability”.
The bank noted with concern over the concentration of higher foreign direct investment into four years – telecom, financial, oil and gas and tobacco – and called for diluting this focus for reduced volatility attached to these flows. Unlike some other countries in the region, “Pakistan attracts little FDI into manufacturing”, which needed to be remedied to stimulate economic and employment growth, by bringing in improved technologies, business practices and innovation to raise the level of manufacturing competitiveness and to accelerate structural change.
The bank said the export growth decelerated to a disappointing 3.3 per cent in 2007 from 14.9 per cent in 2006 mainly because of slower growth in textile accounting for 60 per cent of total exports, which apparently stemmed from greater international competition in the post-quota era. “The ultimate causes of poor exports are grounded in long term and deep structural issues relating to the lack of diversification of export industries, poor compliance with quality standards, and concentration of exports in a small number of markets”.
