ISLAMABAD, Sept 8: The Asian Development Bank has lowered Pakistan’s growth projection to 6.5 per cent (from seven per cent) for 2005-06, owing mainly to an expected deceleration in agriculture, high oil prices and comparatively reduced manufacturing growth.
In its update on Pakistan’s economy, the ADB has raised the country’s inflation projections to 8.5 per cent as against an earlier forecast of five per cent. It warned that expansionary fiscal policy, high oil prices and large monetary overhang may make it difficult to contain inflation.
The Asian Development Outlook 2005 Update, released here on Thursday, said the output at the end of fiscal year 2006 was expected to be about half a percentage point lower.
It said: “Agriculture sector growth is likely to decelerate in fiscal year 2006, mainly because of the high base set the previous year. It will also be difficult to sustain last year’s record cotton output because of already heavier monsoon rains and greater moisture, which increase crop vulnerability to pests. Further, the damage caused by recent floods to standing crops will depress agricultural production.
“Agricultural output is projected to grow by only three per cent in fiscal 2006, as against 7.5 per cent in 2005, the highest in nine years.”
The update says that shortages of essential food items, higher housing rents, a steep rise in oil prices and strong domestic demand pushed inflation in fiscal 2005 to 9.3 per cent, the highest rate in eight years.
“Further tightening of monetary policy and the opening up of imports to wheat and other essential food items will dampen inflationary pressures in 2006. However, expansionary fiscal policy, high oil prices and the large monetary overhang may make it difficult to contain inflation,” the ADB said.
“Exports are expected to post a brisk 15 per cent growth in financial year 2006, due to incentives announced in the current budget, continued modernization of the textile industry, and the ending of the Multi-Fibre Arrangement quotas in January 2005,” it said.
Amid the generally positive outlook, the report points out that high oil prices may negatively affect Pakistan’s economy.
“If international oil prices remain at current levels, or go higher, projections for imports, fiscal deficit and inflation may have to be revised upward, while any negative impact on the global economy could lead to lower growth of exports,” the update cautions.
It says following two years of aggressive growth, large-scale manufacturing is expected to settle with a still-robust but more sustainable growth rate of 11 per cent in fiscal 2006. The exemption of major export industries from the general sales tax and the withdrawal of import duty on raw materials and other supplies will further boost this sector.
The update says the economy is on solid ground due to sound macroeconomic fundamentals, enhanced private investment and significant expansion in the public sector development programme.