ISLAMABAD, Oct 3: The Asian Development Bank said on Wednesday that it foresees no major policy initiatives for structural reforms in Pakistan till the new government is formed after general elections in early 2013 and it sees economic growth at 3.7 per cent in 2012-13 due to macroeconomic imbalances and structural issues.

At present, security issues, energy shortages, financial imbalances, and governance concerns are holding the country back and undermining the business confidence needed to support a dynamic and growing private sector, says ADB in its updated ‘Asian Development Outlook 2012’, published on Wednesday.

Moreover, slackening global demand is likely to further crimp growth in the country’s key exports.

In its monetary policy statement for 2012-13, the central bank reduced policy rates by 150 basis points to motivate greater investment, but the impact of this is likely to be muted by the uncertain business climate, the report notes.

Improving the performance of Pakistan’s economy depends on taking difficult steps to address structural problems. Increasing private investment sufficiently to satisfy growing demand for goods and services depends on the power sector becoming a reliable supplier of electricity and financially viable. Domestic capital markets also need to be developed before private investment can be substantially increased, ADB report said.

According to the report, most important of all is to fundamentally improve the country’s fiscal position by both eliminating subsidies and the drain on public finances caused by loss-making state-owned enterprises and broadening the tax base to raise one of the lowest tax participation rates in the region, promote equity, and provide the revenues needed to fund necessary government functions.

Taking into account the revival of Coalition Support Fund inflows worth $1.2 billion, and the expected continued strong growth in remittances, the report forecast that the current account will likely post a deficit equal to 1.3 per cent of GDP. Exports are projected to grow by 3.0 per cent on weak demand and constrained gas and electricity supply.

Imports are projected to rise by 8.0 per cent, about in line with growth and the expected rise in global prices. Reserves remain adequate but may, along with the exchange rate, come under pressure from the projected current account deficit, lower capital inflows, and higher debt service obligations, ADB further states in its report.

Meeting the announced budget deficit of 4.7 per cent for 2012-13 will be challenging given the tendency for substantial current expenditure overruns, particularly for subsidies, and the prevalence of intra-power sector debts.

Inflation in 2012-13 is projected to average 10.0 per cent. While the federal government repaid in the first months of the fiscal year part of last year’s borrowing from the central bank, the need for domestic budget financing is likely to exceed Rs971 billion in current fiscal year, as external financing is low and budget overruns are apparent, including those caused by elevated inflation expectations that drive up prices, costs, and credit demand, the report says.

Provisional data for the end of fiscal year 2011-2 indicate that domestic debt and liabilities increased by 26.5 per cent to Rs7.9 trillion, or 38.2 per cent of GDP, the marked addition to debt including the financing of some power sector and commodity debts.

During the year, external debt and liabilities rose by 6.2 per cent to Rs5.3 trillion, or 25.6 per cent of GDP, to bring total government debt to 63.8 per cent of GDP. While relatively high, the debt appears manageable, despite rollover and interest rate risks evident in the average maturity being less than 18 months, as most domestic debt is short term.