Pakistan’s economy in fiscal year (FY) 2019, which ended on 30 June, is showing signs of recovery as the government’s fiscal consolidation and austerity measures to address the structural weaknesses started to take effect. However, the growth rate moderated to 3.3% during the period reflecting persistent macroeconomic imbalances and heightened external challenges, according to the Asian Development Outlook Update (ADOU) 2019.
The update of the Asian Development Bank’s (ADB) flagship annual economic publication noted the current account deficit eased from 6.3% of gross domestic product (GDP) in FY2018 to 4.8% in FY2019. The trade deficit narrowed by almost 11.5% to $28.2 billion as rupee depreciation drove down merchandise imports by 7.4%, 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 current account.
Pakistan has done well in stabilizing the economy in face of strong challenges by taming the spiraling current account deficits and export bill and through robust implementation of reforms to improve governance and rejuvenating country’s competitiveness,” said Xiaohong Yang, ADB Country Director for Pakistan. “Pakistan need to press ahead with macroeconomic and structural reforms; revitalizing public sector enterprises; improving revenue collection, energy and water security, and leveraging improved security 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 mostly accounted for by $1.8 billion less in foreign direct investment owing in part to policy uncertainty but also to the 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, and the United Arab Emirates, gross foreign exchange reserves fell by $2.5 billion to $7.3 billion at the end of June 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 FY2019 as the authorities moved toward the adoption of a flexible exchange rate determined by the market, after having defended an overvalued rupee in recent years. Inflation trended substantially higher, from an average of 3.9% in FY2018 to 7.3% in FY2019, mainly reflecting currency depreciation and a considerable increase 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 of Pakistan, the central bank, raised its policy rate by a cumulative 575 basis points to 12.25% at the end of FY2019, 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 in agriculture 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 reversed 5.1% expansion to fall by 2.1% with contraction almost across the board, while construction dropped by 7.6%. Exceptional 40.5% growth in electricity production was registered as new generation projects reached completion fully accounted for industry growth. With marked weakening in agriculture and industry, growth in services slowed from 6.2% to 4.7%.
On the demand side, private consumption, accounting for 82% of GDP, contributed 3.1 percentage points to growth despite higher inflation and borrowing costs. Public consumption, edging up to the equivalent of 12% of GDP, contributed 1.0 percentage point. Meanwhile, contraction in gross fixed investment trimmed growth by 1.3 percentage points, mostly reflecting significantly reduced public investment as the government cut development spending.
“Pakistan need to continue efforts to stabilize and protect the economy against external risks, rising global prices, current account deficit, rising debt servicing, and continued losses of public sector enterprise.” said Ms. Yang.
The report notes that to restore macroeconomic stability, the government plans to catalyze significant international financial support and promote sustainable and balanced growth under a 3-year economic stabilization and reform program with the International Monetary Fund (IMF). Fiscal consolidation under the program aims to reduce the large public debt while expanding social spending, establish a flexible exchange rate regime to restore competitiveness, and rebuild official reserves. The IMF economic reform program 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 is expected to slow further, with GDP growth projected at 2.8% in FY2020. Fiscal adjustments are expected to suppress 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 the government’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, while sustaining its efforts to eradicate extreme poverty. In 2018, it made commitments of new loans and grants amounting to $21.6 billion. Established in 1966, it is owned by 68 members—49 from the region.