ADB hints for missing Pak' budget targets

The Asian Development Bank (ADB) has indicated that despite slightly improvement in the national economy, Pakistan will miss the budgetary targets including the GDP growth, inflation and current account deficit during the current fiscal year.

The ADB issued “Asian Development Outlook Update 2011” on Wednesday and said that Pakistani economy is slightly strengthening from last fiscal year. The Bank reduced the GDP growth projection to 3.7 percent from the government’s target 4.2 percent during the current fiscal 2011-12. Pak economy grew by 2.4 percent during the last fiscal year

The bank said that country’s economy was under pressure in last fiscal year from the aftermath of extensive flood damage, energy shortages, security issues, and a burgeoning fiscal deficit as well as persistently high inflation, despite monetary policy tightening. Still, the current account moved to a small surplus on strong exports and remittances. Growth is expected to pick up modestly in the fiscal year 2011-12, largely on agriculture. However, to get the economy back on a high growth track Pakistan must overcome its long-standing macroeconomic and structural imbalances.

Increasingly severe and unpredictable power outages undermined industry, which virtually stagnated. This outcome was due to a large fall in electricity output, in part caused by a sharp drop in natural gas production and flood damage. Power supply problems in turn hit production in areas such as cement, metal industries, electronics, and textiles, as well as exporters’ ability to deliver on schedule. Agro-based industries were less affected, bolstered by the good wheat and sugarcane harvests. Growth in large-scale manufacturing came in at 1.1 percent. Construction eked out a mere 0.8 percent expansion as public spending shifted from projects to flood relief, and reconstruction work started only after a delay.

The Bank suggested that Pakistan must average seven percent annual growth to absorb the three percent increase in its labour force each year. Its population is young, with more than 65 percent under the age of 30. Yet recent experience, its economy is growing with average by less than three percent in FY2008 to FY2010 which has been too little to take advantage of these favourable demographics.

“Water shortages and low investment in irrigation infrastructure over the years have led to a general decline in agriculture productivity. Agriculture needs structural reforms to bring about higher productivity, transformation, and diversification, but with the sector accounting for 44 percent of total employment, such reforms would reduce labour requirements, and so other sectors would have to create jobs to absorb agriculture’s released workers”, said ADB

The Bank said that inflation is expected to stay high, easing back only slightly to an average of 13.0 percent as against the government forecasted in the budged that it will remain 12 percent. The upward trend in inflation due to the planned upward adjustments in domestic electricity prices, the restoration of automatic pass-through of fuel price increases to consumers, and strong inflation expectations built into the economy.

Realizing the budget for the fiscal year with a lower deficit of four percent of GDP is largely depends on containing subsidies and boosting revenues. The budget is expected to gain from steps to cut power and other subsidies by 57 percent relative to the last fiscal year. While efficiency gains in the power sector have somewhat reduced the need for tariff differential subsidies, ending subsidies depends on the pace of power sector reforms.

The budget for the current fiscal year projects the public sector development program to expand to Rs730 billion, an increase of 58 percent over the last fiscal year provisional figure. For achieving the ambitious target, in view of limited external resource availability, will depend on fully mobilizing budget resources and pushing through measures to contain current expenditure.
The current account is seen weakening in current fiscal year because of slower export growth of eight percent (mainly reflecting less favourable export prices) and import growth of 14 percent (mirroring still-high commodity prices and some economic strengthening).

Domestic public debt rose by 29.2 percent to Rs. 6.0 trillion (33.3% of GDP) by end-of the fiscal year 2010-11, while external public debt rose to $56.3 billion (PRs4.8 trillion), or 26.6% of GDP. The average maturity for domestic public debt has fallen to 18 months and, with interest rates above 12%, interest costs were equivalent to about 35% of federal tax revenue during the last fiscal year. The shortening maturity for domestic debt raises both rollover and interest rate risk. Most external debt is, though, contracted at a modest average interest rate and relatively long tenors.

Investment declined for the third straight year, taking the investment-to-GDP ratio to only 13.4 percent in 2010-11 from 22.5 percent in 2007. The poor showing stems from several factors, including the downdraft in the economy, weakness in the investment climate, and security issues.