Asian Development outlook 2018: Pakistan’s growth to slow down to 5.1pc in fy19: ADB
After five years of upward movement, Pakistan’s economy is expected to slow down to 5.1% in the next fiscal year 2018-19 because of growing external account challenges, said the Asian Development Bank (ADB) on Wednesday.
The Manila-based lending agency has advised Pakistan to tighten the monetary policy and let the rupee further depreciate to tackle external account challenges.
Owing to the widening current account deficit, “securing adequate financing to contain the drawdown in foreign exchange reserves is a concern,” cautioned the ADB in its annual flagship publication, Asian Development Outlook (ADO) 2018.
The bank’s report indicates another stormy year ahead for Pakistan’s economy as it sees higher current account and trade deficits coupled with a decline in economic growth and official foreign currency reserves.
The ADB’s findings are contrary to the government’s assessment that expects low pressure on the external account due to implementation of a majority of China-Pakistan Economic Corridor’s (CPEC) energy and infrastructure projects.
“GDP growth is expected to adjust downwards in fiscal year 2018-19 to 5.1% as balance of payments constraints seem to outweigh improvements to supply-side factors such as better security and energy supply,” said the ADB.
The government has announced that the national economy showed a provisional growth of 5.8% in the outgoing fiscal year, which was the highest in the last 12 years and fifth straight year of high growth.
The ADB said while credit growth slowed in the first eight months of the current fiscal year, demand pressures kept imports high and the resulting steady drawdown of foreign exchange reserves indicated a need for policy tightening.
“Other concerns were the rise in global oil prices and a firming outlook for higher interest rates in the US and global capital markets.”
“Pakistan’s economic prospects in coming years remain positive if budget and current account deficits are reduced and exports are rejuvenated by improving the country’s competitiveness,” said ADB Country Director for Pakistan Xiaohong Yang.
She said Pakistan could maintain a stronger growth trajectory through domestic and regional stability, improving overall competitiveness, revitalising public sector enterprises as well as timely completion and effective use of infrastructure projects.
The ADB said the flexibility in determining the exchange rate would help mitigate the erosion of competitiveness due to appreciation of the real effective exchange rate in past years.
It said the current account remained under pressure in the first eight months of fiscal year 2017-18 as the deficit rose to $10.8 billion, or 4.8% of estimated GDP for the period, from $7.2 billion in the year-earlier period.
The current account deficit would likely edge up a bit to equal 4.9% of GDP by the end of the fiscal year and in the next year it would also remain around 4.5% of GDP, it added.
The preliminary projection of 4.5% current account deficit in fiscal year 2018-19 was based on the assumption of “somewhat slower growth, but continued implementation of CPEC projects”. Successfully financing these large investments will require the government to pursue real structural reforms.
The ADB said the currency depreciation and the transmission of rising international oil prices to the domestic market were also expected to boost inflation in the second half of the year, generating average inflation of 4.5% in the outgoing fiscal year.
Inflation is projected to accelerate marginally to 4.8% in FY2019, reflecting increases in global oil prices and rupee depreciation against major currencies.
It said declining exports pose a major challenge to the sustainability of external accounts. Various structural weaknesses undermine Pakistan’s trade performances. In particular, weak logistics and trade facilitation, including customs procedures, add to transaction costs.
Economy faces challenges’ due to reforms’ reversal
Pakistan’s economy is now on a sustained growth path but it faces challenges due to the reversal of reforms after the Panama Papers case, which has increased the fiscal deficit to an unmanageable level.
This was stated by former finance secretary Dr Waqar Masood Khan while speaking with media in Lahore.
He said the PML-N government moved the economy up gradually from an average growth of less than 3% during 2008-13 to 5.8% in the first nine months of the current fiscal year. He said the housing sector is buoyant, car sales are growing at above 28% and inflation has hovered at 3.2% in the first nine months of this fiscal year.
Khan said prudent government policies have been complemented by a favourable global commodity situation.
“The agriculture sector posted a growth of 3.5% that has kept food prices in check, followed by a healthy investment by both public and private sectors.”
Country not to make csf part of budget estimates
After 16 years, Pakistan has decided to exclude the Coalition Support Fund (CSF) receipts from the United States from its new fiscal year budget estimates, indicating that the relations between the two countries are unlikely to revive to the pre-Donald Trump era in the near future.
The decision to exclude the CSF estimates from the budget 2018-19 has been taken during the pre-budget meetings being held in the finance ministry, according to sources.
The CSF payments are reimbursements of the cost that Pakistan has incurred while fighting the US-led global war against terrorism.
Since 2001 when Pakistan became a frontline state in the war against terror, the country received CSF at an average of $971.5 million per annum. However, this will be the first time since then that the government will not make the CSF receipts part of the budget, as the US did not disburse any sum in the past one year.
The CSF disbursements will not be part of the non-tax revenue estimates being prepared for the financial year 2018-19, said Dr Miftah Ismail, Adviser to Prime Minister on Finance, while talking to source.
“Pakistan has sufficient resources to meet its defence needs and can also take care of people affected by war against terrorism”, said Ismail.
He further said that the next year’s budget will be presented on the realistic revenue and expenditure estimates and “the doubtful receipts like the CSF will not be part of the budget”.
The de facto finance minister said the US still owed $9 billion to Pakistan that “we spent while fighting the war against terrorism”.
Ismail’s statement indicates departure from the past when the budgets were presented by understating the expenditures and overstating the revenues.
For the outgoing fiscal year, Pakistan had budgeted Rs141.8 billion (or $1.33 billion) from the US on account of the CSF disbursements. But so far Washington has not released any amount.
PM’s aide going to attend IMF meetings just days before this budget
Prime Minister Shahid Khaqan Abbasi has decided to send his finance aide to attend spring meetings of the International Monetary Fund (IMF) in a bid to assess the mood in Washington before Pakistan makes a decision on whether to seek another bailout.
The decision to send Dr Miftah Ismail, Adviser to Prime Minister on Finance, to Washington hardly 10 days before the announcement of budget signifies the importance of the move. Ismail would go to Washington on April 18 on a three-day visit, according to officials.
The government will present next fiscal year’s budget on April 27, about five weeks ahead of the original schedule as the government’s constitutional term is going to end in the first week of June.
The new democratic government is expected to be installed in August. By that time, Pakistan’s gross official foreign currency reserves are projected to reach dangerously low levels due to a yawning current account deficit.
Pakistan’s external account is currently under stress and the country is facing a financing gap of roughly $8 billion to meet its immediate international obligations, said sources. Pakistan’s foreign currency reserves have already dropped to $11.6 billion, which are barely sufficient to cover two months of import bill.
This has raised speculation that the country will have to seek another IMF bailout package between June and September this year.
Ismail confirmed that he would attend spring meetings of the World Bank and the IMF. However, he categorically denied that he would initiate bailout talks with the IMF. “We do not have a plan to get the IMF programme at this stage,” he said.
Sources said the sole purpose of the adviser’s visit was to gauge the mood of the US treasury and the IMF management. The IMF has assessed Pakistan’s gross financing needs at $24.5 billion for the current fiscal year and at a record $27 billion for the next year.
It said the widening current account deficit and rising external debt servicing, in part driven by the China-Pakistan Economic Corridor (CPEC)-related outflows, were expected to lead to higher external financing needs.
Pakistan was also trying to seek financial assistance from a few friendly countries to ease pressure off the external account that was fast eating up the foreign currency reserves.
In times of political transition, it was unlikely that any country would help Pakistan steer out of the crisis, particularly China and Saudi Arabia, said Haroon Sharif, a senior economist who remained regional adviser to the World Bank Group. He suggested that before going to the World Bank-IMF meetings, the finance adviser should hold consultations with mainstream political parties to have a better game plan.
KPK backs fwo in building oil pipeline
While extending support to Frontier Works Organisation (FWO), the government of Khyber-Pakhtunkhwa (K-P) has opposed the laying of an oil pipeline from Machike to Taru Jabba (Nowshera) by Inter State Gas Systems (ISGS), a federal government entity.
FWO and ISGS have emerged as potential competitors to build the vital oil pipeline.
A public hearing was conducted by the Oil and Gas Regulatory Authority (Ogra) in Peshawar for the grant of licence for constructing the oil pipeline that was estimated to cost $370 million.
During the hearing, a K-P representative said the province fully supported the route proposed by FWO and the project would prove to be a game changer for meeting strategic needs of the country.
An FWO representative stated that the project would cater for growing fuel demand of K-P. “It will not only help in curbing carbon emissions and improving the environment, but will also make better the economic condition of general public by creating thousands of job opportunities,” he said.
The representative assured the regulator that the project would be completed in a record time of two years.
In a statement, K-P Oil and Gas Company Limited Chief Executive Officer Raziuddin said he participated in the public hearing on behalf of the provincial government.
He said the project would help meet strategic defence needs of Pakistan and the route proposed by FWO was economically viable and would ease the burden on end-consumers.
He recalled that the project was proposed by Attock Refinery in 2001, but it could not be implemented because of various reasons.
“The project is the need of the hour and no further time should be wasted,” he emphasised and asked the regulator to grant licence to FWO immediately so that the project could be completed well before time.
Raziuddin also talked about the performance of ISGS, which was also interested in acquiring the licence for building the oil pipeline.
He was of the view that none of the mega pipeline projects including Iran-Pakistan gas pipeline, Turkmenistan-Afghanistan-Pakistan-India (Tapi) gas pipeline and North-South pipeline had been completed by ISGS.
All the projects had been delayed with no commercial operation dates, he argued, adding the pipeline route proposed by ISGS was not only long, but would also put a heavy burden on end-consumers by pushing up petroleum prices.