Pakistan's economy in fiscal year (FY) 2019, which ended on 30 June, isshowing signs of recovery as the government's fiscal consolidation and austerity measures to address thestructural weaknesses started to take effect
ISLAMABAD (Pakistan Point News / Online - 25th September, 2019) Pakistan's economy in fiscal year (FY) 2019, which ended on 30 June, isshowing signs of recovery as the government's fiscal consolidation and austerity measures to address thestructural weaknesses started to take effect. However, the growth rate moderated to 3.3% during the periodreflecting persistent macroeconomic imbalances and heightened external challenges, according to the AsianDevelopment Outlook Update (ADOU) 2019.
The update of the Asian Development Bank's (ADB) flagship annual economic publication noted the currentaccount deficit eased from 6.3% of gross domestic product (GDP) in FY2018 to 4.8% in FY2019. The tradedeficit narrowed by almost 11.5% to $28.2 billion as rupee depreciation drove down merchandise imports by7.4%, particularly for goods other than petroleum. Despite currency depreciation in real effective terms,merchandise exports declined by 2.
2%, partly because low cotton production constrained textile exports.Workers' remittances stirred from 3 years of near stagnation to grow by 9.7%, lending support to the currentaccount.Pakistan has done well in stabilizing the economy in face of strong challenges by taming the spiralingcurrent account deficits and export bill and through robust implementation of reforms to improvegovernance and rejuvenating country's competitiveness," said Xiaohong Yang, ADB Country Director forPakistan.
"Pakistan need to press ahead with macroeconomic and structural reforms; revitalizing publicsector enterprises; improving revenue collection, energy and water security, and leveraging improvedsecurity and regional cooperation opportunities, to secure the hard won gains and promote growth."The financial account surplus narrowed considerably in FY2019, by 16.2%, the $2.3 billion fall mostlyaccounted for by $1.8 billion less in foreign direct investment owing in part to policy uncertainty but also tothe winding down of energy and infrastructure projects in the China-Pakistan Economic Corridor.
However,notwithstanding large bilateral financing received from the People's Republic of China, Saudi Arabia, andthe United Arab Emirates, gross foreign exchange reserves fell by $2.5 billion to $7.3 billion at the end ofJune 2019, or cover for 1.7 months of imports, noted the report.Other notable challenges included 24 percent depreciation of Pakistan rupees against the US dollar FY2019as the authorities moved toward the adoption of a flexible exchange rate determined by the market, afterhaving defended an overvalued rupee in recent years.
Inflation trended substantially higher, from anaverage of 3.9% in FY2018 to 7.3% in FY2019, mainly reflecting currency depreciation and a considerableincrease in domestic fuel prices. Average food inflation reached 4.6%, partly because of the poor harvest,and nonfood inflation accelerated to 9.2%. To keep policy rate positive in real terms, the State Bank ofPakistan, the central bank, raised its policy rate by a cumulative 575 basis points to 12.
25% at the end ofFY2019, and by another 100 basis points to 13.25% in July 2019.On the supply side, all sectors contributed substantially less to GDP growth than a year earlier. Growth inagriculture decelerated from 3.9% to 0.8% as water shortages meant smaller harvests of major crops.Industry growth fell markedly from 4.9% to 1.4% as demand weakened. Large-scale manufacturing reversed5.1% expansion to fall by 2.1% with contraction almost across the board, while construction dropped by7.
6%. Exceptional 40.5% growth in electricity production was registered as new generation projects reachedcompletion fully accounted for industry growth. With marked weakening in agriculture and industry, growthin services slowed from 6.2% to 4.7%.On the demand side, private consumption, accounting for 82% of GDP, contributed 3.1 percentage points togrowth despite higher inflation and borrowing costs. Public consumption, edging up to the equivalent of12% of GDP, contributed 1.
0 percentage point. Meanwhile, contraction in gross fixed investment trimmedgrowth by 1.3 percentage points, mostly reflecting significantly reduced public investment as thegovernment cut development spending."Pakistan need to continue efforts to stabilize and protect the economy against external risks, rising globalprices, current account deficit, rising debt servicing, and continued losses of public sector enterprise." saidMs. Yang.The report notes that to restore macroeconomic stability, the government plans to catalyze significantinternational financial support and promote sustainable and balanced growth under a 3-year economicstabilization and reform program with the International Monetary Fund (IMF).
Fiscal consolidation underthe program aims to reduce the large public debt while expanding social spending, establish a flexibleexchange rate regime to restore competitiveness, and rebuild official reserves. The IMF economic reformprogram envisages a multiyear strategy for revenue mobilization to pare public debt to a sustainable level.The budget assumes tax revenue increased to equal 14.3% of GDP. With non-tax revenue projected at 2.3%of GDP in FY2020, total revenue is expected to increase to 16.
6% of GDP.Given the need for the authorities to address sizable fiscal and external imbalances, the economy isexpected to slow further, with GDP growth projected at 2.8% in FY2020. Fiscal adjustments are expected tosuppress domestic demand, and demand contraction will keep growth in manufacturing subdued. However,agriculture is expected to recover from weather-induced contraction this year, with major incentives in thegovernment's agriculture support package included in the budget for FY2020.ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, whilesustaining its efforts to eradicate extreme poverty. In 2018, it made commitments of new loans and grantsamounting to $21.6 billion. Established in 1966, it is owned by 68 members-49 from the region.