ISLAMABAD: The Asian Development Bank (ADB) has cautioned that the political demonstrations, floods as well as security challenges for Pakistan pose downside risks to the economic growth forecast for fiscal year 2015.

In its ‘Update’ to the ‘Asian Development Outlook 2014’ published on Thursday, ADB revised the economic growth projection for 2015 to 4.2 per cent, and states projections for 2015 assume that the government will make satisfactory progress on its economic agenda to reform the energy sector and state-owned enterprises, rationalise import tariffs, and improve the business climate.

Revising the growth projection, the ADB report however, said even concentrated reform would need several years to eliminate electricity and gas shortfalls and to effect the change needed to lift structural constraints on growth.

GDP growth projected at 4.2pc reflects some easing of fiscal consolidation and increased allocations for public sector development spending. Continuing reform and an improving security environment would further boost business confidence and foster private investment. The prospect of strong growth in manufacturing depends on further progress in easing energy shortages.

The consolidated budget for 2015 targets further trimming the deficit to 4.9pc of GDP from 5.5pc estimated for last fiscal year through reduced expenditure. This projected decline in the deficit assumes a provincial cash surplus equal to 0.9pc of GDP.

The budget envisages current expenditures increasing by only 1.6pc from the estimated out-turn in fiscal year 2014. While most major categories of spending increase by double-digit, including a 10pc increase in salaries and pensions and a 15pc increase in interest payments, large savings are expected from a 37pc drop in subsidies, equal to 0.6pc of GDP, achieved mainly by cutting untargeted power subsidies.

Containing subsidies will be a challenge given overruns in recent years, and success will depend on implementing power sector reforms to raise tariffs enough to meet costs, improve collection, reduce leakage, and invest in generation, transmission, and distribution systems.

Power tariff increases in fiscal year 2014 helped reduce subsidies, but savings were partly offset by subsidies to cover improved supply.

The ADB report says that consumer price inflation is expected to average 8.2pc in fiscal year 2015, slightly down from 8.6pc in fiscal year 2014.

A business and consumer sentiment survey in May 2014 found inflationary expectations had steadied, apparently reflecting improved exchange rate stability and much lower domestic borrowing for budgetary support as development partners help finance the government’s economic programme.

While the increase in public sector salaries and some increase in electricity tariffs will exert upward pressure on prices, declining international commodity prices and a relatively stable exchange rate should help contain inflation. On the supply side, food prices will remain a key determinant of inflation as in recent years.

The ‘Update’ projects that the continued strong inflows of remittances are expected to help limit the current account deficit to 1.3pc of GDP in fiscal year 2015. Manufacturing should benefit from better electricity supply, allowing a boost in textile production.

With access to the European Union under the GSP+, exports are projected to increase by 4pc. Imports are projected to advance by 5pc, a rate essentially unchanged from fiscal year 2014, reflecting a marginal increase in growth, easing prices for oil and other commodities, and continued stagnation in private investment.

The current account deficit is expected to be financed by continued modest flows of private direct and portfolio investment, sustained multilateral and bilateral lending to support the government’s economic reform programme, and planned government borrowing from international capital markets.

The report says that the reforms initiated by the government helped improve economic conditions during the year.

Renewed support from development partners and a $2 billion Eurobond issue, the first in seven years, helped stabilise the currency and rebuild foreign exchange reserves from very low levels.

The continuation of economic reforms and efforts to improve the security environment would improve business confidence and help revive private investment, it says.

According to the ‘Update’, along with the increase in reserves, the Pakistan rupee appreciated in March and broadly stabilised at Rs97.5 to the end of fiscal year 2014.

This followed depreciation of about 6pc in the first seven months of the year and preceded a fall to Rs102.6 in early Sept 2014 in response to demonstrations that began in August.

In real effective rate terms, the rupee appreciated by 5.6pc in fiscal year 2014, with possible adverse implications for export competitiveness, the report notes.

Capital and financial inflows were very strong in the second half of 2014 with two notably successful Eurobond placements, the one-off receipt of $1.5bn from Saudi Arabia, and disbursements of programme loans from multilateral agencies.

Published in Dawn, September 26th, 2014