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ADB estimates Pakistan’s growth at 2.8% in 2008-09

By Sajid Chaudhry

islamabad: Asian Development Outlook (ADO) 2009 has projected Pakistan's economic growth at 2.8 percent for current fiscal year 2008-09 due to the impact of the global slowdown, tight demand management policies and the power deficit.

ADB's Country Director, Rune Stroem has termed fall in growth as "warning bells on for Pakistan" and has said growth less than 3 percent is concern for us as well as any body else, growth less than 3 percent has its social implications as un-employment being major impact.

Addressing a media briefing at Pakistan Resident Mission along with country economist Safdar Parvez, Rune Stroem said Pakistan has been fortunate being not affected, as it has not yet adopted such sophisticated financial instruments that had led to financial crisis in US and around the globe.

However, he was of the view that global economic slowdown would definitely affect Pakistan's economy in terms of negative impact on exports, reduced foreign investment and remittances in months to come. Mr Stroem said its ripe time for Pakistan to learn the global financial crisis and prepare its own second generation capital and financial market reforms having effective checks on instruments to be introduced.

Pakistan's economic growth is not expected to fall further as terrorist attacks, militancy, political instability as well as power and gas shortages have been kept in view while finalising the growth estimates, Safdar Parvez informed.

ADB is extending financial help to Pakistan for finalising second generation financial sector reforms and would also help to put in place effective regulatory mechanism to save its financial sector from crisis similar to global crisis, Rune added.

Growth in agriculture will improve with respect to that in the last fiscal year, but will remain moderate on account of high input costs including electricity, fertilizers, pesticides and pest attacks.

The sugarcane crop has been disappointing and the cotton crop has been short of target. However, the wheat crop is projected to be very good because of improved water availability and a 52 percent increase in the support price for farmers, announced in September 2008.

Energy shortages, the law and order situation and capacity and input constraints caused by higher import prices from the large depreciation of the Pakistan rupee will lower industrial performance.

Growth in services, too, will moderate because of the knock-on effect of the lower growth momentum in the commodity-producing sectors on wholesale and retail trade. The performance of the financial sub-sector could be affected by the increase in non-performing loans this year.

The fiscal deficit is expected to decline in FY2009, as the government removes or reduces subsidies and rationalises development expenditure. With the fiscal deficit targeted to fall to 4.3 percent of GDP, the government has already fully eliminated the subsidy on petroleum products, and is undertaking a phased reduction in the electricity subsidy, with the target to remove this subsidy too by the end of FY2009.

A reprioritisation of projects is expected to lead to a slashing of the development budget by over Rs 100 billion for FY2009. The fiscal deficit in the first half of the fiscal year of 1.9 percent of GDP suggests that the authorities are on course on meeting the fiscal deficit target for the full year. The economy needs to develop infrastructure and invest in health and education. Deficit spending can be carried out judiciously and it need not be inflationary because the economy is very far from full employment.

Although global food and oil prices are on the decline, the increase in the wheat support price and the reduction in subsidies, along with currency depreciation, will together keep up the inflationary pressure in FY2009, resulting in an average consumer price inflation of around 20.0 percent. Despite the fact that inflation pressure declined from November 2008 to January 2009, the consumer price index, food inflation and core inflation were still all over 20percent on a year-on-year basis.

Despite growth in exports, the current account deficit jumped to $7.3 billion in first half of 2009 and came in 20 percent higher than in the same period in the previous fiscal year. A comparison of the first 7 months reveals that the current account deficit in FY2009 was only 1.5 percent above the level in FY2008. Imports would need to continue to compress significantly in the second half of FY2009 to improve the current account balance. The current account deficit is projected to go down to 6.0 percent of GDP in FY2009. Workers' remittances would need to be sustained to achieve the projected reduction in the current account imbalance. The current account gap remains a major challenge that was exacerbated by the deterioration in the financial account in the 7 months of FY2009. This imbalance imposes a balance-of-payments constraint to sustainable growth in Pakistan.

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