The Asian Development Bank's Asian Development Outlook 2019 (ADO) reaffirms that the country's economy is expected to grow slower than last year, with GDP growth projected at 2.8 per cent in fiscal year 2020.
The ADO, released on Wednesday, notes that growth in Pakistan had decelerated during fiscal year 2019 and this reflected "lower investment amid policy uncertainty and persistent macroeconomic imbalances".
"Sizeable currency depreciation accelerated inflation but helped substantially narrow the current account deficit," it noted.
The report stated that Pakistani authorities are implementing a "comprehensive programme of fiscal consolidation and monetary tightening to stabilise the economy and address structural weaknesses".
As per the report, provisional estimates have found that GDP growth slowed from 5.5pc in FY2018 to 3.3pc in 2019.
It notes that on the supply side, all sectors had "contributed substantially less" to GDP growth than a year prior. Whereas, on the demand side, private consumption has accounted for 82pc of the GDP "despite higher inflation and borrowing costs".
In the updated assessments, the ADO notes that the rupee depreciated against the US dollar by 24pc in FY2019 and inflation was also higher at 7.3pc as compared to FY2018 at 3.9pc.
The report stated that rising inflation was "mainly reflecting currency depreciation and a considerable increase in domestic fuel prices".
Additionally, it found that the higher fiscal deficit was financed primarily through domestic borrowing while the current account deficit had reduced from 6.3pc of GDP in FY2018 to 4.8pc of GDP in FY2019.
Addressing the prospects for the country, the ADO said: "To restore macroeconomic stability, the government plans to catalyse significant international financial support and promote sustainable and balanced growth under a 3-year economic stabilisation and reform programme with the International Monetary Fund (IMF). Fiscal consolidation under the programme aims to reduce the large public debt while expanding social spending, establish a flexible exchange rate regime to restore competitiveness, and rebuild official reserves."
The report found that fiscal adjustments would suppress domestic demand and in turn, the demand contraction would keep growth in manufacturing "subdued".
However, it found that agriculture was expected to recover with the assistance of the government's agriculture support package.
The report projected that inflation which was 9.4pc in July and August would rise to 12pc in FY2020 due to "a planned hike in domestic utility prices, taxes introduced in the FY2020 budget, and the lagged impact of currency depreciation".
"Pressure from inflationary expectations can be relieved by the government’s commitment to refrain from directly financing the budget deficit by borrowing from the central bank as monetary policy continues to tighten."
"The economic reform program supported by the IMF envisages a multiyear strategy for revenue mobilization to pare public debt to a sustainable level. The budget assumes tax revenue increased to equal 14.3pc of GDP. With nontax revenue projected at 2.3pc of GDP in FY2020, total revenue is expected to increase to 16.6pc of GDP."
Additionally, expenditure in FY2020 is projected to equal 23.8pc of GDP while the budget deficit in FY2020 is expected to equate to 7.2pc of GDP.
"To strengthen fiscal discipline, the government has recently adopted the Public Financial Management Act in the context of the FY2020 finance bill."
Meanwhile, the report found that the trade deficit had shrunk by "nearly half" in the first half of July.
"With further narrowing of the trade deficit and a continued positive trend in workers’ remittances, the current account deficit is projected to narrow further to 2.8pc of GDP in FY2020. Import payments will remain subdued, reflecting weak economic activity and the pass-through of past rupee depreciation against US dollar."
"The real effective exchange rate is now thought to be near equilibrium, and a lower and more stable rupee is expected to improve export competitiveness."
Additionally, foreign capital inflows are expected to increase.
"Foreign direct investment should revive as investors’ confidence is restored with implementation of the IMF stabilisation and reform program.
"This should also help bring additional finance from multilateral institutions and other international partners," the report stated, adding that the activation of a Saudi oil facility with a potential disbursement in the current fiscal year, were expected to raise foreign exchange reserves to over $10 billion by the end of FY2020.