Asian Development Bank headquarters in Manila.
Asian Development Bank headquarters in Manila.

ISLAMABAD: Pakistan will continue to face macroeconomic challenges despite tight fiscal and monetary policies to rein in twin deficits leading to deceleration of the GDP to 3.9 per cent in the ongoing fiscal year, says the Asian Development Bank (ADB) in a report released on Wednesday.

In its assessment of Pakistan’s economy in the ‘Asian Development Outlook’ for 2019, the Manila-based bank warns that “until macroeconomic imbalances are alleviated, the outlook is for slower growth, higher inflation, pressure on currency and heavy external financing is needed to maintain even a minimal cushion of foreign exchange reserves.”

Moreover, lower revenue collection and higher current expenditure pushed the budget deficit from 2.3pc of the GDP in the first half of 2018-19 to 2.7pc a year later. Pointing out the supply-side slowdown, the bank warns the agriculture sector is likely to underperform the 3.8pc growth target for the ongoing fiscal year as well amid water shortages.

Large-scale manufacturing reversed 6.6pc growth in the first half of fiscal year 2018 to decline by 1.5pc in the same period of FY19 as domestic demand contracted and rising world prices crimped demand for raw materials.

Furthermore, a slowdown in agriculture and industry, as domestic demand shrinks, will keep services growth ­subdued as well.

Stabilisation measures and rising inflation are likely to contain growth in private consumption and investment, while public sector development spending has already slackened. With exchange rate flexibility and declining imports, net exports are expected to contribute to growth.

In first eight months of the current fiscal year, government borrowed more from the central bank and less from commercial banks, freeing up liquidity for commercial banks to boost credit to the private sector by 18.9pc. This sharply increased net domestic assets and nearly doubled broad money growth to 2.8pc.

The current account deficit is expected to narrow in the ongoing current fiscal year but will remain high at the equivalent of 5pc of GDP mainly due to widening trade deficit. It will narrow further to 3pc in fiscal year 2019-20 as pressures on external accounts ease.

Export growth plunged from double digits in the first seven months of the previous fiscal year to 1.6pc in the ongoing fiscal year but is likely to strengthen in the coming months and further in FY 2019-20 as lagged impact of currency depreciation and incentive package for export-oriented industries announced in January kicks in.

Imports fell by 0.8pc in the first seven months of the current fiscal year, with imports other than oil down 5.7pc due to slower domestic economic activity, currency depreciation and an increase in import duties for nonessential items.

Remittances are expected to revive — having already risen by 10pc in the first seven months of current fiscal year — as Pakistan rupee depreciates further, economic activity in the Middle-eastern oil exporting countries — major destination of Pakistani migrants — holds broadly steady and government takes measures to facilitate ­remittances through official channels.

However, inflows that do not incur debt such as foreign direct investment, are expected to be lower in current ­fiscal year as several CPEC energy ­projects are near completion.

Financing a high current account deficit in fiscal year 2018-19 will require substantial borrowing and foreign exchange reserves — down to $8.1 billion in February — will likely remain stressed at the end of current fiscal year.

The outlook report highlights that Pakistan lags behind the South Asian regional average on most index indicators; business competitiveness suffers under a challenging macroeconomic environment followed by adverse

terms of trade, significantly eroding production and exports.

The report adds that country’s exports lack sophistication and diversification condemning them to declining shares in global trade accentuated by the high cost of doing business limiting firms’ ability to compete.

Moreover, access to affordable capital is constrained by a shallow and underdeveloped capital market; manufacturing firms face high corporate tax rates, taxes on dividends and retained earnings, cascading taxes levied on inter-corporate dividends and a super tax levied on retained reserves.

The effective corporate tax rate at 49pc diminishes competitive ability of the country’s exports in the international markets. High custom duties on machinery increase investment costs. Similarly, high tariffs and unreliable electric power add to production costs.

Pakistan’s cumbersome customs and clearance procedures and poor quality of logistics and infrastructure remain a constraint for the just-in-time supply chain management.

Published in Dawn, April 4th, 2019