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ISLAMABAD: Pakistan’s real GDP is projected to grow by 1.9 percent in fiscal year 2024, driven by a rebound in private sector investment linked to progress on reform measures and transition to a new and more stable government, says the Asian Development Bank (ADB).

The Bank in its latest report ‘Asian Development Outlook 2024’ stated growth is projected to remain subdued in fiscal year 2024 and pick up in fiscal year 2025, provided economic reforms take effect.

In Pakistan, growth is forecast to rise 1.9 percent in fiscal year 2024 (ending on 30 June 2024) and 2.8 percent in fiscal year 2025, up from the 0.2 percent contraction last fiscal year. The shift back to positive growth will come from a recovery in both agriculture and industry. However, domestic demand will remain constrained by the surge in living costs and tight macroeconomic policies.

However, Pakistan will continue to face challenges from substantial new external financing requirements and the rollover of old debt, exacerbated by tight global financial conditions. The outlook is uncertain, with high risks on the downside.

GDP posts 1pc growth in Q2FY24: NAC

Political uncertainty that affects macroeconomic policy making will remain a key risk to the sustainability of stabilization and reform efforts. On the external front, potential supply chain disruptions from escalation of the conflict in the Middle East would weigh on the economy. With Pakistan’s large external financing requirements and weak external buffers, disbursement from multilateral and bilateral partners remains crucial. However, these inflows could be hampered by lapses in policy implementation.

The Bank stated that if reforms are implemented, growth is forecast to restart gradually this fiscal year and improve slightly next year. Inflation is projected to moderate somewhat this year, and more next year, under stabilization policies. Improving women’s financial inclusion is critical to strengthen growth.

Stabilization policies and reforms under International Monetary Fund (IMF) programs have alleviated debt distress risks in crisis-affected economies such as Sri Lanka and Pakistan, although challenges remain in sustaining reforms given the substantial debt servicing costs.

An expansion in private consumption and a rise in workers’ remittances from a move toward a market determined exchange rate should buttress growth. However, low confidence, a surge in living costs, and the implementation of tighter macroeconomic policies under the IMF SBA will restrain domestic demand. In fiscal year 2025, growth is projected to reach 2.8 percent, driven by higher confidence, reduced macroeconomic imbalances, adequate progress on structural reforms, greater political stability, and improved external conditions.

On the supply side, growth will be led by post flood recovery in agriculture. Output will rise from a low base on improved weather conditions and a government package of subsidized credit and farm inputs that will support expanded area under cultivation and improved yields. Higher farm output will help expand manufacturing, which will also benefit from the increased availability of critical imported inputs. Large-scale manufacturing expanded in 3 of the first 6 months of fiscal year 2024. Higher crop output and some improvement in global growth are expected to support recovery in industrial output in the latter half of the year. Construction will remain weak due to elevated construction costs, higher tax rates on property transfers implemented in the fiscal year 2024 budget, and rationalization of public investment to consolidate the fiscal position. Growth in services is projected to strengthen in fiscal year 2024 as recovery in agriculture and industry benefit services.

The Bank stated that inflation will remain elevated at about 25 percent in fiscal year 2024, driven by higher energy prices, but is expected to ease to 15 percent in fiscal year 2025.

The report noted that while improvement in food supplies and moderation of inflation expectations will likely ease inflationary pressures, further increases in energy prices envisaged under the IMF SBA are projected to keep inflation high. Headline consumer inflation increased to 28 percent in the first 8 months of fiscal year 2024, mainly from hikes in administered energy prices. Although improved supplies have tempered food inflation, it remains high, driven largely by rising prices for energy and inputs to agriculture. Core inflation also remains elevated, reflecting domestic recovery and the pass-through of upward adjustments in energy prices.

The central bank has maintained a tightened monetary policy, keeping the policy interest rate at 22 percent in response to persistent inflationary pressures and external imbalances. The central bank has committed to keeping an appropriately tight policy to lower inflation to its medium-term target range of 5 percent–7 percent.

The government projects significant fiscal consolidation in the medium term, supported by increased revenues and rationalized spending, the report noted.

The goal is to achieve a primary surplus of 0.4 percent of GDP and an overall deficit of 7.5 percent of GDP in fiscal year 2024, with both declining gradually in subsequent years. Considerable progress toward the goal occurred during the first half of the fiscal year, with a primary surplus of 1.7 percent of GDP and an overall deficit of 2.3 percent.

Total revenue increased to 6.5 percent of GDP in the first half of fiscal year 2024 from 5.6 percent in the same period in fiscal year 2023, mainly from higher petroleum levy receipts and increased profit transfers from the central bank. Tax collection increased by 29.5 percent, as reforms in the personal income tax, higher taxes on property transfers, and the reintroduction of taxes on cash withdrawals from banks and the issuance of bonus shares raised direct tax collections. Revenue mobilization is expected to strengthen in the medium term, reflecting planned reforms to broaden the tax base. A rise in interest payments equal to 1 percent of GDP from higher interest rates boosted expenditure to 8.8 percent of GDP in the first half of fiscal year 2024 from 7.6 percent a year earlier. Fiscal consolidation will also benefit from plans to rationalize current expenditure.

In Pakistan and Sri Lanka, challenges remain in sustaining reforms given the substantial debt servicing costs. In Pakistan, fiscal revenues remain weak with rising interest payments expected to consume 63% of budget revenues (compared to 39.5% in 2022).

The relaxation of import restrictions, coupled with economic recovery, is expected to widen the current account deficit. The current account deficit fell to $1.1 billion in the first 7 months of fiscal year 2024 from $3.8 billion in the same period in fiscal year 2023, as the merchandise trade deficit narrowed by 30.8 percent.

Merchandise imports declined by 11.1 percent from weak demand growth, lower global food and fuel prices, and higher domestic production of cotton and wheat. Merchandise exports rose by 9.3 percent. However, imports are expected to expand during the year as domestic demand strengthens and stabilization of the currency market makes it easier for firms to import inputs. Thus, the current account deficit is projected to widen to 1.5 percent of GDP in fiscal year 2024. A transition toward a market-determined exchange rate is expected to encourage remittance inflows through official channels, thus enhancing the economy’s resilience under future external shocks.

The Bank stated that Pakistan has one of the lowest financial inclusion rates for women in the world. While Pakistan’s overall financial inclusion has improved, the gender gap in account ownership more than doubled over the past decade, reaching 32 percent in 2021. The World Data Lab estimates that, without immediate action, this gap will widen to over 42% by 2030. In a World Bank survey encompassing 135 economies, Pakistan ranked fourth lowest overall, and third lowest in Asia, on female financial inclusion. More than three out of every five Pakistani women remain unbanked.

Pakistani women face multiple barriers when accessing finance. On the demand side, low female labor force participation means that most women lack a steady income stream and are largely dependent on male family members for their financial needs.

Social and religious traditions influence gender roles, with women viewed as homemakers rather than breadwinners. The absence of formal income and proper documentation makes it difficult for women to open and maintain standard bank accounts, as banks consider them high risk. Moreover, low literacy levels and insufficient financial education undermine women’s ability to utilize formal banking channels and render them more susceptible to fraud. Rural women are further marginalized, as their access to banks is even more limited due to long distances and commute times.

On the supply side, expanding women’s financial inclusion requires strong will and a prioritized push for legal and regulatory change.

Copyright Business Recorder, 2024

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Sumaroo Apr 13, 2024 01:39pm
One can project any number one likes....contrary to ground realities...
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