ISLAMABAD: The Asian Development Bank (ADB) said on Tuesday Pakistan’s economy is showing signs of recovery with moderate growth rate of 3.4 per cent this year.

Structural reforms to broaden the revenue base through better tax administration and eliminating exemptions and energy subsidies are critical for fiscal sustainability and the reallocation of resources to promote investment and economic growth.

The ‘Asian Development Outlook 2014’ published on Tuesday points out that continued energy sector subsidies, growing losses incurred by state-owned enterprises, and high expenditures for national security are some of the factors testing Pakistan’s financial discipline in recent years.

While the government’s commitment to severely limit energy subsidies is underscored by various initial measures, such efforts need to be more comprehensive.

Apart from further price adjustments, substantial governance reforms to reduce theft and losses in transmission and distribution are needed, emphasised the report.

The report says that consolidated expenditure for the first half of fiscal year 2013-14 (FY14) was contained partly by reduced interest payments following the earlier clearance of circular debt.

Interest payments are likely to be high in second half of 2014 as domestic borrowing finances the deficit. In addition, the risk of a rebuild of circular debt in the current fiscal year remains high, it says.

The growth rate is marginally slower than in fiscal year 2012-13 (FY13), but economic indicators project the economy to grow by 3.9pc in 2015.

“We expect a turnaround of the economy in 2016, as we are engaged in ongoing dialogue for more reforms in subsidy on structural reforms and subsidy on energy. A process is going on the rationalisation of tariff,” said Werner Liepach, ADB Country Director while releasing the development outlook at a press briefing on Tuesday.

The year 2014 is a difficult year from fiscal point of view, however positive results to come from next year as the government is doing remarkably, and overall it is a clear message, he said.

According to the outlook, agriculture is expected to be weaker this year due to a drop in cotton output, which partly offset the improvement in sugarcane and rice crops.