• Says economic outlook hinges on fulfilling commitments under IMF’s new $7bn bailout
• Warns high taxes and costly energy will push inflation from single digits to 15pc in FY25

ISLAMABAD: Constrained by increased personal income tax rates and high energy costs and resultant low consumption, Pakistan’s economic growth has been estimated to be struggling at 2.8 per cent in FY25, which remains subject to domestic and external risk, according to the Asian Development Bank (ADB).

“Higher personal income tax rates in the FY25 budget and the government’s efforts to limit spending will constrain private and public consumption. In addition, growth in agriculture is projected to slow in FY25 as higher administered prices for gas and lower subsidies raise the cost of fertiliser,” said the Manila-based lending agency in its Asian Dev­elo­pment Outlook (ADO). “The economy is expected to grow by a moderate 2.8pc in FY25.”

On the other hand, the ADB anticipated the inflation to rise from its recent lows due to the impact of fiscal measures in the FY25 budget, including higher sales taxes on some items and energy tariff adjustments required to ensure cost recovery in the energy sector.

However, with an appropriately tight monetary policy, reduced exchange rate volatility, and a stable outlook for international food prices, inflation expectations are anticipated to moderate later in the year. Therefore, average inflation is projected at 15pc in FY25.

It said that Pakistan’s outlook hinged on continued and effective economic reform as committed to the IMF under the 37-month Extended Fund Facility arrangement worth about $7 billion that should catalyse significant international financial support for the underlying economic stabilisation and reform programme.

The IMF programme, it said, should enhance macroeconomic stability as it aimed to consolidate public finances, expand social spending and protection, rebuild foreign exchange reserves, reduce fiscal risks from state-owned enterprises, and improve the business environment to encourage growth led by the private sector.

The reform programme is expected to support economic activity by providing a more stable macroeconomic environment. Private investment should rebound on more favourable macroeconomic conditions, including easier access to foreign exchange. This will also benefit manufacturing and services, it added.

The ADB warned that “high downside risks cloud Pakistan’s economic outlook”. With Pakistan’s sizeable external financing requirements, its economic outlook was vulnerable to any shortfall in external inflows, making timely disbursements from multilateral and bilateral partners crucial, it said.

The Manila-based lending agency also highlighted that lapses in policy implementation could jeopardise these inflows, increasing pressure on the exchange rate and worsening sovereign debt vulnerabilities.

It also warned of heightened political and institutional wrangling notwithstanding the government commitments to the necessary stabilisation and structural reforms. The government “faces challenges owing to elevated political and institutional tensions and the prospects of social unrest from a steep drop in real incomes”, the ADO noted and added that devastating floods in 2022 demonstrated Pakistan’s vulnerability to climate-induced natural disasters, further complicating the economic outlook.

Externally, the main risks to macroeconomic stability stem from the economic impacts of adverse geopolitical developments, including higher food and oil prices and tighter global financial conditions. On the upside, improved global financing conditions and lower international food and fuel prices would reduce fiscal and external vulnerability, lower inflation, and allow for a faster buildup of external buffers, the ADO noted.

Fiscal consolidation targets tax measures equal to 3pc of GDP over the EFF period. With tax revenue measures equal to 1.5pc of GDP already implemented through the FY2025 budget, tax revenue is projected to rise to 11.2pc of GDP in FY2025. With non-tax revenue forecast at 3.1pc of GDP, total revenue is expected to increase to 14.3pc of GDP by the end of this fiscal year, it said.

Published in Dawn, September 26th, 2024