Karachi, April 3, 2019: Asian Development Bank (ADB) has further decelerate Pakistan’s GDP growth forecast to 3.9 percent in FY2019 as macroeconomic challenges continue and despite steps to tighten fiscal and monetary policies to rein in high and unsustainable twin deficits.
According to ADB report, to meet its large financing needs, the government is discussing a macroeconomic stabilization program with the International Monetary Fund in addition to arranging financial assistance and oil credit facilities from bilateral sources.
Continued fiscal consolidation in FY2020 will keep growth subdued at 3.6 percent.
The supply side is already showing signs of slowdown. Agriculture is expected to underperform the 3.8 percent growth target for FY2019 after water shortages struck as wet season crops were being sown.
Large-scale manufacturing reversed 6.6 percent growth in the first half of FY2018 to decline by 1.5 percent in the same period of FY2019 as domestic demand contracted and rising world prices crimped demand for raw materials.
Contraction hit all key categories, including a 0.2 percent decline in textiles. A slowdown in agriculture and industry as domestic demand shrinks will keep growth in services subdued. A government structural reform package announced in January 2019 is expected to support agriculture, facilitate new business openings, and continue to expand capacity in some industries to the forecast horizon.
Stabilization policies and rising inflation are likely to contain growth in private consumption and investment, while public sector development spending has already slackened. With exchange rate flexibility and declining imports, net exports are expected to contribute to growth.
Average inflation accelerated sharply from 3.8 percent in the first 8 months of FY2018 to 6.5 percent in the same period of FY2019, led by a surge in nonfood inflation to 9.1 percent that reflected currency depreciation and a significant increase in gas tariffs for consumers and industry in the first half.
Food inflation remains relatively moderate at 2.6 percent thanks to sufficient stocks of food staples. In response to intensifying inflationary pressures, the central bank gradually raised, in four rounds from July 2018 to January 2019, its policy rate by 375 basis points to 10.25 percent.
Despite tighter monetary policy and lower international oil prices, inflation is expected to rise sharply to average 7.5 percent in FY2019, driven up by continued heavy government borrowing from the central bank, hikes to domestic gas and electricity tariffs, further increases in regulatory duties on luxury imports, and the lagged impact of currency depreciation by more than 10.7% since July 2018. Inflation will remain elevated at 7.0% in FY2020.
A supplementary consolidated government budget for FY2019, adopted in September 2018, envisages a decline in the budget deficit to 5.1 percent of GDP in FY2019, mainly by cutting the development expenditure excluding CPEC projects, but it also included measures to enhance revenue and extend relief to the poor. Growth in tax collection weakened from a robust 16.4 percent in the first half of FY2018 to only 2.7 percent a year later.
The Federal Board of Revenue targets tax collection equal to only 11.6 percent of GDP in FY 2019, taking into account reduced sales taxes on major petroleum products, drag on the collection of withholding tax from contracts, contraction in general sales tax revenue as imports slow, and the overall slowdown in the economy. Including nontax revenue, total revenue declined by nearly 2.4 percent in the first half of FY2019.
