Pakistan’s adherence to economic adjustment programme crucial for stability, growth: ADB

ISLAMABAD: Pakistan faces significant economic challenges with high downside risks, warns the latest report from the Asian Development Bank (ADB).

In the report, the country’s adherence to an economic adjustment programme through April 2024 has been deemed crucial for restoring stability and achieving gradual growth recovery.

The ADB’s Asian Development Outlook for September 2023, published on Wednesday, highlights that expansionary fiscal and monetary policies have reached their limits, resulting in falling growth, rising inflation, a weakened rupee, and shrinking international reserves.

The report projects that Pakistan’s gross domestic product (GDP) growth is expected to reach a modest 1.9% in FY2024, with persistent price pressures.

On the external front, Pakistan faces potential challenges from tighter global financial conditions and possible supply chain disruptions due to the Russian invasion of Ukraine.

Political instability amid the election season remains a significant risk to implementing reform efforts aimed at stabilizing growth, restoring confidence, and managing debt sustainability.

The report underscores the importance of disbursements from multilateral and bilateral partners for reserve accumulation, exchange rate stability, and improved market sentiment.

“Greater fiscal discipline, a market-determined exchange rate, and speedier progress on reforms in the energy sector and state-owned enterprises are key to reviving economic growth and protecting social and development spending.” – Yong Ye, Country Director ADB #ADOU2023 pic.twitter.com/owe2zuosQV

— ADBPakistan (@PakistanADB) September 20, 2023

Near-term economic prospects in Pakistan hinge heavily on progress within the economic adjustment program, which includes fiscal consolidation, monetary tightening, a market-determined exchange rate, and structural reforms in areas such as energy, state-owned enterprises, banking, and climate resilience.

The report projects a modest recovery in FY2024, though uncertainty will persist, and demand growth will be constrained by stabilization measures. The 1.9% growth projection is slightly lower than forecasts made six months ago.

The report anticipates a rebound in private consumption and private investment by approximately 3% and 5%, respectively. However, fiscal and monetary tightening, coupled with double-digit inflation, will temper demand.

It said that implementing the economic adjustment programme and a smooth general election are expected to boost confidence. The easing of import controls should support investment, particularly as fiscal tightening restrains public consumption, it said.

The report said that favourable weather conditions and government relief measures for agriculture are set to enhance output, which will, in turn, benefit the industry sector. The report predicts a rise in exports, albeit with faster import growth.

Despite these prospects, significant downside risks remain, including potential global price shocks and slower global economic growth.

The report also outlines fiscal targets, including a primary surplus of 0.4% of GDP and an overall deficit of 7.5% of GDP in the FY2024 budget. It highlights efforts to increase tax revenues and reduce provincial spending while safeguarding priority social and development expenditures.

“Inflation is expected to ease in FY2024 due to base year effects and normalised food supply. The central bank is likely to raise the policy rate from the 22% set in July to gradually reduce inflation to its medium-term target of 5–7%. However, significant inflationary pressures persist,” the report said.

The report anticipated sharp increases in petroleum, electricity, and gas tariffs as part of the adjustment programme. As import and exchange rate controls are relaxed, the rupee may further weaken, driving up the cost of imported goods, it said.

It said that external factors such as the El Nino climate pattern and the ongoing Russian invasion of Ukraine could disrupt supplies and raise prices of essential food items, contributing to high inflation, projected to be around 25% in FY2024.

Despite a larger current account deficit, the report said, international reserves are expected to grow, due to the new programme with the International Monetary Fund (IMF) and a more market-determined exchange rate, which is set to stabilise the currency market and encourage remittance inflows through official channels.