ADB revises up Pakistan growth projection for FY 2017
In its updated flagship economic publication Asian Development Outlook (ADO) launched on Tuesday, it said that the growth projections for next year were retained for all economies of South Asia except Pakistan, which is higher, and Sri Lanka, which is lower.
The ADO which is launched annually in March and updated in September provides a comprehensive analysis of macroeconomic issues in developing Asia.
The report added that a major impetus to growth in FY2017 and beyond would be the implementation of $46 billion program of infrastructure spending on roads, railways, pipelines and electric power in an economic corridor project linking Pakistan with the People's Republic of China (PRC), which was announced in April 2015.
Fast-tracking would enable several energy projects to come on stream in FY2018, the report added.
The government significantly strengthened macroeconomic fundamentals and advanced a comprehensive program of structural reform under a 3-year program with the IMF that ended in September 2016.
Inflation has been squashed to the low single digits, foreign reserves rebuilt, and the budget deficit markedly reduced.
Tax reform was launched to improve revenue performance, and substantial progress achieved toward restructuring the power sector.
Key challenges remain, however, regarding governance and security issues, reviving agriculture and improving its productivity, increasing exports and attracting investment, strengthening public enterprises, and improving the business and regulatory environment.
The report observed that the planned reduction in the FY2017 budget deficit would enhance funding for private sector credit and better enable it to meet rising domestic demand.
The general government budget for FY2017 projects further reduction in the deficit to 3.8% of GDP achieved by adopting new revenue measures and streamlining current expenditure.
Tax revenues are projected to increase by half a percentage point, raising the ratio of tax to GDP to 12.8% by eliminating more tax concessions and exemptions, expanding the withholding system as part of administrative reform to widen the tax base, and raising some excise taxes and customs duties, the report added.
Inflation is now expected to average 4.7% in FY2017.
The upward revision takes into account expected oil price rises and stronger domestic demand in an increasingly supply constrained economy.
It is tempered by the prospect of a broad agricultural recovery and only modestly higher global food prices. The July 2016 Monetary Policy Statement covering the first 2 months of FY2017 kept policy rates unchanged as the central bank continues its cautious forward-looking approach, expecting to hold inflation within the range of 4.5%-5.5%.
The report observes that the current account deficit was expected to widen in FY2017 to about $5 billion, or 1.6 % of GDP, which is higher than forecast in March.
The revision reflects a somewhat greater increase in global oil prices than expected and continued expansion in other imports stemming from faster economic growth.
Exports are expected to perform better during the year, increasing by nearly 5% as a recovery in cotton production underpins an upturn in textile sales, and as global prices for non-oil commodities reverse from a sharp decline to a modest increase.
The report added that the mobilization of larger inflows into the capital and financial accounts had been central to the 3-year economic program with the IMF, and these flows are projected to increase to $6.5 billion in FY2017, mainly with more foreign direct investment and continuing sizeable official flows.
Thus, even with the projected widening of the current account deficit, the overall balance should remain in surplus, augmenting official reserves.
The corridor project with the China is expected to attract more foreign direct investment, and already in 2015 investors announced 40 greenfield projects worth a remarkable $19 billion, or 4 times the norm in recent years.
Moreover, the decision by Morgan Stanley Capital International to put Pakistan in its MSCI emerging market index, effective from May 2017, will likely spur equity portfolio inflows.