ISLAMABAD: The Asian Development Bank (ADB) said on Tuesday Pakistan’s economy is showing signs for moderate growth of 4.2 per cent during this fiscal year (FY15) on the back of low international oil prices.

The PML-N government has projected economic growth target of 5.1pc for 2014-15. But, according to the ADB, this target is likely to be missed. If it happened, it would be the second consecutive year for the government to fall short of the growth target, largely because of slow pace of reforms in energy, taxation and public sector enterprises.

The growth for the next fiscal year (2015-16) was projected at 4.5pc, which could be higher if economic reforms proceed at a faster pace. The projections assume steady progress in macroeconomic and structural reforms, manageable political and security challenges, and normal weather.

The ‘Asian Development Outlook 2015’ launched on Tuesday points out that the government has made some progress in implementing macroeconomic and structural reforms to strengthen its fiscal position, alleviate energy shortages, and restructure and privatise loss-making public enterprises. However, progress remains slow in a challenging political and security environment.

Lower expenditures are budgeted for FY15, with current expenditures reduced by 1pc of GDP from the previous year, partly reflecting a cut in subsidies to bring them down to 0.7pc of GDP. As receding oil prices reduce the cost of generating electricity in thermal plants, which account for 33pc of the country’s power generation, it is possible to limit electricity tariff increases further while reining in power subsidies.

Risks to the budget targets include elevated expenditures to enhance security, a build-up of power sector arrears, and failure to realise planned revenues. Missed targets could force down development spending, which, at 1.1pc of GDP in the first half of FY15, was already badly trailing its budget allocation equal to 4.2pc. The plan to finance the fiscal deficit during 2014-15 relied largely on domestic borrowing from commercial banks and non-bank sources.

A lower consolidated fiscal deficit projection at 4.9pc of GDP in FY15 assumes that the Federal Board of Revenue’s tax collection increases by 0.7pc of GDP to Rs2.8 trillion. The target was revised down to Rs2.6tr in February 2015 because revenues fell short of expectations in the first half (July-Dec).

Taxable transactions fell steeply amid lower world commodity prices, reductions in administered electricity tariffs and prices for petroleum products in the first half of the fiscal year, and weak large-scale manufacturing.

The report says the non-bank financing was 43pc of the budgeted amount during the first half of FY15. As government targets zero borrowing from the central bank for the budget, borrowing from banks to cover the revenue shortfall in the first half climbed to over 80pc of planned borrowing for the full year. To address banks’ liquidity shortages in the money market, the central bank made significant injections on the open market.

The current account deficit is expected to narrow to 1pc of GDP during this fiscal year from 1.1pc a year earlier, because of lower world prices for oil and other commodities, a sustained increase in remittances, and expected Coalition Support Fund inflows.

Import growth slowed to 0.9pc in the first seven months of FY15 from 5.3pc in the same period a year earlier, reflecting lower oil import payments. However, non-oil imports rose by nearly 6pc as higher domestic prices for wheat drove a 16pc increase in food imports.

Exports contracted by 2.5pc during the first seven months of FY15, as lower prices for cotton cloth and yarn exports more than offset strong gains by readymade garments, knitwear, and bedwear that benefit under the European Union’s GSP+ scheme. Lower input costs should provide some support for exports and manufacturing growth during the second half of the fiscal year and into FY16.

Pakistan’s exports may suffer as the US dollar strengthens against currencies of Pakistan’s export competitors and as the euro weakens. The rupee appreciated in real effective terms by 3.5pc in the first six months of FY15. Energy shortages are expected to continue, and volatility in supply remains a risk to exports and growth.

The financial account surplus increased sharply to $2.4 billion in the first seven months of the year from $527 million in the same period of FY14. This came in large part from an upsurge in portfolio inflows to $1.2bn in the period, from a mere $141m a year earlier, as the issuance of sukuk (Islamic bonds) in December 2014 brought in $1bn.

The report, while analysing the economic prospect for the current fiscal year, shows weak (preliminary) results for some major crops are expected to limit any rebound in agriculture in FY15. Lower prices will likely suppress sugarcane output, but increased rains in the first half of FY15 should have benefited rice production.

Continued power and gas shortages, lower cotton and edible oil prices, and weak external demand for some products such as cotton yarn and cloth and cement are likely to contain growth in large-scale manufacturing, which decelerated to 2.7pc during July-Dec 2014 from 6.6pc in the same period a year earlier. Growth slowed down in most of the components, including low-end textiles, electronics, and petroleum products. Fertiliser and food output also declined. Only iron and steel, automobiles and leather products picked up from last year.

Higher credit to private cement producers and construction firms for infrastructure projects suggests strengthening activity in these sectors. Lower input costs, including easier credit conditions and borrowing costs in the second half of FY15, should help improve the industrial outlook. Services are expected to grow in line with the performance of commodity producing sectors.

Consumer price inflation averaged 5.8pc in July-Jan FY15, decelerating from 8.8pc in the same period of FY14. Moreover, a significant reduction in government borrowing from the central bank in the latter part of FY14 likely helped contain inflation expectations.

Following the marked decline in inflation, the central bank revised the policy interest rate downward in November 2014 and January 2015 by a cumulative 150 basis points to 8.5pc (cut further to 8pc in the latest monetary policy). It had earlier kept the policy rate unchanged from November 2013 to contain inflation.

Headline inflation is expected to average 5.8pc in FY15, assuming some rise in oil prices from lows in the first half of FY15, some hiked gas and electricity tariffs towards implementing structural policy to bring tariffs closer to cost recovery, and the impact of mid-year increases in sales taxes and duties for several items to bolster budget revenue.

Published in Dawn March 25th , 2015

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