ISLAMABAD - The Asian Development Bank (ADB), on Friday, has projected that Pakistan’s economic growth would slow down to 2.6 percent during current fiscal year due to ongoing stabilization efforts, slower growth in agriculture and the impact of the COVID-19 outbreak.

“GDP growth is forecast to decelerate to 2.6% in FY2020 as ongoing stabilization efforts further curtail economic activity,” according to the ADB’s latest annual flagship economic publication, Asian Development Outlook (ADO) 2020. The current account and fiscal deficits will narrow further, but inflation is expected to leap briefly into double digits. Expanding social protection is crucial for ensuring inclusive growth.

“Pakistan’s strong and decisive policy measures have started to yield positive results in reversing macroeconomic imbalances and narrowing current account deficits,” said ADB Country Director for Pakistan Xiaohong Yang.

“Although Pakistan’s economy is in better shape than before, the nation needs to work together to tackle the new challenges posed by COVID-19—including uncertain short term growth prospects—and its related socioeconomic repercussions. The government’s emergency package and extensive use of Ehsaas will be vital to blunting the detrimental impacts of the pandemic, particularly on the poor and vulnerable,” ADB country director said.

According to the ADB agriculture is expected to see slow growth as the worst locust infestation in over 2 decades damages harvests of cotton, wheat, and other major crops. The government has declared a national emergency to combat the infestation.

Modest growth is expected in some export-oriented industries such as textiles and leather. However, large-scale manufacturing, which provides over half of industrial production, will likely contract, as it did in the first half of FY2020 when currency depreciation ran up production costs for some industries and forced them to raise their prices. The ongoing COVID-19 outbreak will pose a downside risk to growth prospects as it further dampens consumer demand and as private businesses is temporarily shutdown in efforts to control the pandemic. However, the ADB noted that growth is expected to accelerate to 3.2 percent in FY2021, driven by a rebound in investment as macroeconomic imbalances are corrected, currency depreciation is contained, and the locust infestation subsides.

According to the report, inflation is projected to accelerate to 11.5 percent in FY2020, reflecting a sharp rise in food prices in the first part of the fiscal year and a 9.8 percent drop in the value of the local currency against the US dollar in the first 7 months of FY2020. A new price series that tracks price movements in rural as well as urban markets showed rural food inflation averaging 16.3% in the first 7 months of FY2020, while urban food inflation stood at 14.5%. However, high food inflation is expected to be mostly transitory, likely to dissipate as food supplies improve in the second half of the fiscal year. Further, a drop in international oil prices forecast in the second half of FY2020 should translate to lower production and transport costs for goods and services, which could be passed on to consumers.

After raising the policy rate to 13.25% at the beginning of FY2020, the central bank reduced it in 2 steps to 11.00% in March 2020 following the decline in global oil prices and sluggish demand under COVID-19. Growth in private sector credit has slowed considerably. Inflation is forecast to decelerate to 8.3% in FY2021 with the central bank expected to take further policy action to both manage inflation and boost economic activity.

The fiscal deficit is expected to narrow to 8.0% of GDP in FY2020 as the government continues to prioritize consolidation. In the first half of FY2020, the deficit fell as revenue collection rebounded from the equivalent of 6.1% of GDP a year earlier to 7.3%. A fall in import duties caused by import contraction was compensated by the reinstatement of levies on petroleum products and telecommunication services, the elimination of exemptions for export-oriented industries, and higher profit transfers from the central bank and the Pakistan Telecommunication Authority. On the expenditure side, spending increased from 8.7% of GDP in the first half of FY2019 to 9.6% on higher interest payments and public development programs to protect public investments and support business activity, particularly activity connected with construction.

Further, health care and other social expenditure is expected to be significantly higher as the government addresses COVID-19. The decline in the oil price may adversely affect government revenues due to reduced petroleum tax receipts.

To finance the fiscal deficit, the government restructured its short-term borrowing from the central bank into long-term securities in a bid to increase the average maturity of domestic debt and reduce its interest rate. Improving the primary budget balance as planned will reduce public debt ratios, moving the economy closer to debt sustainability as GDP growth recovers somewhat in FY2021 and further in subsequent years.

The current account deficit is expected to continue narrowing to the equivalent of 2.8% of GDP in FY2020 with a reduction in the trade deficit resulting from currency depreciation, the imposition of regulatory duties to contain import demand, and continued recovery in workers’ remittances following declines in FY2016–FY2018. In the first half of FY2020, the current account deficit narrowed sharply from 5.8% of GDP a year earlier to 1.5%. Modest growth in the key exports textiles, rice, and leather was supported by loans under a central bank export finance scheme and long-term financing facility for exporters. This was complemented by a notable reduction in imports restrained by higher import duties. Weaker demand under COVID-19 could adversely affect exports, but on balance exports should strengthen due to policy stability, improvement in ease of doing business, and lagged effects of currency depreciation. Thanks primarily to the lower oil price, the current account deficit is projected to narrow further to equal 2.4% of GDP in FY2021.

FDI inflow soared by 62.5% year on year in the first half of FY2020. Short-term capital has also poured in rapidly to buy government securities denominated in Pakistan rupees that offer attractive returns. Supported by these flows, international reserves are expected to improve to 2.2 months of import coverage at the end of FY2020.