ISLAMABAD, Nov 1: The growing current account deficit, continuing high inflation and the emerging power shortages are potential risks to the country’s medium-term economic prospects, warns the Asian Development Bank (ADB).

“Any deterioration in the law and order situation could also adversely affect medium-term growth,” further says the latest ADB Economic Update finalised in late October 2006.

It added that the end of China specific safeguards imposed by the United States and European Union (EU) against textiles and clothing (T&C) imports in 2008 may further weaken Pakistan’s textile export prospects.

“The current account deficit is projected to increase to $8.5 billion, or 5.9 per cent of GDP”.

A possible further increase in oil prices, in case of sanctions against Iran for example, could also hurt Pakistan’s economic prospects, the report feared.

With pro-growth government policies, continuous increase in the public sector development programme, and projected increase in total investment, the medium-term outlook for the economy is positive and the growth target of 7-8 per cent looks feasible.

The real GDP growth in 2006-07, the update said, is projected at 7.0 per cent. The main commodity producing sectors are expected to pick up and the services sector is likely to maintain its robust growth.

The projected high growth is underpinned by a substantial increase in investment last year and further increase in investment forecast for the current financial year. Expected stabilisation of oil prices will also help growth.

Substantial public sector investment in irrigation in the last several years and a sharp increase in import of agricultural machinery last year is expected to boost agriculture output, as well the duty-free import of tractors, enhanced subsidy on fertiliser, and the new package of incentives for the livestock sector, all announced in the 2006-07 budget.

Heavier than normal rains in the monsoon season is expected to help the water-intensive rice and sugarcane crops. Greater moisture in the soil will also improve the prospects of wheat crop.

“However, the cotton crop could be adversely affected by greater moisture, which makes the crop more vulnerable to pest attacks. On balance, the agriculture sector is projected to growth by 4.5 percent in 2006-07,” the update believed.

The industry sector is expected to expand by 9.0 per cent. The large-scale manufacturing, which accounts for almost half of the value added in the industry sector, is expected to grow by 11.0 per cent, supported by new investment in textiles, cement and fertiliser industries, and a number of incentives provided in the 2006-07 budget.

With the projected high GDP growth, extension of tax net to real estate transactions, and increase in tax rates on some financial services, tax receipts are expected to maintain a robust double-digit growth in 2006-07. Non-tax receipts are expected to exceed the budget estimate, as the estimate of receipts from the USA for logistic support for the war in Afghanistan appears conservative.

Current expenditure is also expected to exceed the budget, mainly because of expected overrun in the interest payment on domestic debt. The budgeted decline in interest payment on domestic debt is not likely to be achieved, considering the increased domestic debt stock at the beginning of the year, the higher planned borrowing from the banking system for the financing the budget, and the expected further increase in interest rates. On the balance, the fiscal deficit is likely to increase to 5.0 per cent of the GDP in 2006-07,” the update said.

The target for fiscal deficit for the current financial year has been fixed at 4.5 per cent of the GDP.

Inflation is expected to decline in 2006-07, as monetary policy is further tightened, the supply of food is augmented by the projected higher growth in agriculture, and the oil price stabilises. The low monetary growth in 2005-06 relative to the growth of nominal GDP will also have a lagged dampening effect on inflation in 2006-07 is expected to decline to 5.6 per cent.

Import growth is likely to decelerate in 2006-07 because of expected stabilisation of oil prices and lower demand for consumer durables because of higher interest rates. However, the projected high economic growth and substantial increase forecast in investment will sustain high growth of imports, which is expected to remain at about 15.0 per cent.