ISLAMABAD: Broad economic recovery in Pakistan with 2 percent GDP growth in fiscal year 2021 is projected with improved economic sentiment as COVID-19 pandemic subsides and structural reforms resume.
This was forecast in the Asian Development Bank's latest issue of the Asian Development Outlook.
The ADO uploaded by ADB on its website on Tuesday, however, highlighted that the prospects for economic outlook is subject to unusually potent downside risks in light of uncertainty about the duration and magnitude of the COVID-19 pandemic, the persistence of containment measures, and more than expected fall in remittances.
"Broad economic recovery is projected for fiscal year 2021, with GDP growth estimated to rebound to 2.0 percent, lower than forecast in ADO 2020. This forecast assumes that the COVID-19 impact will subside by the end of 2020-the end of the second quarter of fiscal year-allowing global conditions to normalize and economic sentiment to improve," the ADO further noted. It also assumes the resumption of structural reform under an ongoing IMF Extended Fund Facility program to address macroeconomic imbalances.
The government has proposed detailed economic stimulation measures in its fiscal year 2021 budget. In addition to reallocating Rs7 billion from the Federal Public Sector Development Programme budget to COVID-19 response, the proposed budget raises allocations for initiatives that provide social protection to the disadvantaged. The flagship Ehsaas program would scale up from Rs190 billion in fiscal year 2020, or 2.3 percent of government expenditure, to Rs230 billion in fiscal year 2021, or 2.6 percent, the ADO added and continued that with support from development partners, the government has been deploying the Benazir Income Support Programme to further counter the detrimental impacts of the COVID-19 pandemic. On the supply side, agriculture is expected to continue to lend impetus to GDP growth. Crop damage from a severe locust infestation in fiscal 2020 prompted several budgetary measures, including an agriculture emergency program worth Rs13.7 billion to support investment and expansion in agriculture and livestock rearing.
The prospect of growth in industry is projected to improve in fiscal year 2021, led predominantly by construction and small-scale manufacturing. In addition to the normalization of global economic conditions, improved market sentiment, and stronger business and consumer confidence expected with the easing of the COVID-19 pandemic by the end of the first half of fiscal year 2021, a relatively low policy rate should facilitate the financing of industrial initiatives.
The ADO projected that spurred by improved growth in agriculture and industry, coupled with an expected improvement in domestic demand overall, services should also contribute to growth in. Inflation is projected to slow to 7.5 percent in ongoing fiscal year, lower than the April forecast in ADO 2020 driven by the expected economic recovery, but tempered by expenditure reform, and the government's decision to stop borrowing from the central bank, which should help slow growth in the money supply to 14.2 percent in fiscal year 2021. An upside risk to the inflation forecast is global oil prices rising higher than currently projected. A greater risk would be electricity tariff increases currently under consideration to improve cost recovery in the industry and help bring down government subsidies.
The fiscal deficit is forecast to decline to the equivalent of 7 percent of GDP in FY2021. Revenue is projected to increase, reflecting ambitious revenue-mobilization targets following initiatives to withdraw tax exemptions, rationalize tax concessions, and broaden the tax base. This forecast depends on COVID-19 risks subsiding and rapid economic recovery to pre-COVID norms.
Fiscal expenditure is projected to increase only slightly as the anticipated curtailment of some current expenditures such as subsidies somewhat compensates for higher development and social sector spending, which will continue to rise to support growth and economic recovery.
The current account deficit is anticipated to remain contained at the equivalent of 2.4 percent of GDP in fiscal year 2021, unchanged from the ADO 2020 forecast, exports are expected to grow with the likely pickup in economic activity in Pakistan's major trade partners, and as Pakistan's exports become more competitive due to government measures to reduce business costs. Imports will rebound from a low base in fiscal year 2020 and, more importantly, in response to economic recovery in current fiscal year-and despite higher tariffs on imports of nonessential goods.
Remittances should continue to cushion the current account deficit but will likely be lower than in fiscal year 2020 with the layoff of Pakistani workers overseas, in particular in the Persian Gulf, as economic activity remains soft globally.
Continued improvement is anticipated in the balance of payments and foreign reserve position in current fiscal year. This prospect owes to a flexible, market-determined exchange rate regime adopted in early 2019, which significantly improved the last fiscal year (2020) external position; the anticipated containment of fiscal and current account deficits; debt service suspension granted by the Group of 20; and increasing foreign direct investment. The ADB's ADO added that Pakistan's public debt is expected to revert to a downward trajectory as the IMF stabilization program improves prospects for fiscal consolidation, and assuming rapid economic recovery from the COVID-19 shock.
Copyright Business Recorder, 2020
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