ISLAMABAD - Pakistan’s economy continues to struggle with low growth, higher inflation rate, security issues and macroeconomic imbalances as budget deficit reached to 8.5 per cent and official reserves sagged by $ 4.7 billion under the weight of larger debt repayments coupled with reduced capital inflows.

This was the crux of the Asian Development Bank (ADB) report “Outlook 2012 update: Services and Asia’s Future Growth”. The report has presented bleak picture of the Pakistan’s economy. The report stated that sluggish growth, an uncertain economic environment, and a decline in business confidence have steadily undermined investment and raised concern for the country’s future growth prospects.

The reported stated that economic growth has averaged at just 3 per cent during the tenure of incumbent government that is well below the 6.8 per cent average of the last government’s tenure. The report stated that Pakistan’s economic growth would remain around 3.7 per cent against the government’s target of 4.2 per cent during the ongoing fiscal year 2012-2013, as the energy shortage is expected to continue as a binding constraint throughout the year.

According to the report, the contribution from investment and net exports were negative, reflecting sluggish economic conditions and electric power disruption. Fixed investment has steadily decline from 20.9 per cent of the GDP in 2007 to 10.9 per cent in the last fiscal year 2012, as business conditions deteriorated in the country. Meanwhile, the drop in net exports reflected fallout in export volume coupled with increased imports.

However, the report started that inflation rate has decreased in the fiscal year ended on June 30, as it was recorded at 11 per cent against 13.7 per cent of the preceding year. Inflation would remain around 10 per cent during the current fiscal year 2012-2013. Inflation expectations are a factor in the persistence of inflation, as the public recognizes that the government’s heavy borrowing from the State Bank of Pakistan, the central bank, stokes inflation. Such borrowing conflicts with legislation, including the State Bank of Pakistan Act, and the Fiscal Responsibility and Debt Limitation Law, which mandate that the government steadily lower its debt profile.

Fiscal sustainability remains a concern; as the budget deficit in last financial year 2011-2012 increased to 8.5 per cent of GDP from 6.6 per cent a year earlier, well above the 4 per cent target. Recurrent outlays accounted for the bulk of the overrun, reflecting mainly larger spending on power sector subsidies and funding to partly settle power sector arrears. Meanwhile, budget deficit target of 4.7 per cent for the ongoing fiscal year 2012-2013 would be challenging given the tendency for substantial current expenditures overruns particularly for subsidies and the prevalence of intra power sector debts.

According to the report, provisional data for the end of FY2012 indicates that domestic debt and liabilities increased by 26.5 per cent to Rs7.9 trillion, or 38.2 per cent of GDP, the marked addition to debt including the financing of some power sector and commodity debts. During the year, external debt and liabilities rose by 6.2 per cent to Rs5.3 trillion, or 25.6 per cent of GDP, to bring total government debt to 63.8 per cent of GDP.

The current account returned to a deficit of 2 per cent of GDP in FY2012, mainly owing to a 12 per cent increase in imports as oil payments climbed 16.7 per cent higher and fertilizer imports doubled to offset the impact of gas shortages on domestic production. A 2.8 per cent fall in exports was an additional factor, mainly reflecting a marked decline in demand for food exports. Textile exports stagnated as volume fell in the second half of the year due to severe power outages, but favorable export prices for much of the year helped to maintain earnings. A strong expansion in worker remittances by 17.7 per cent kept the current account deficit in check.

Inflows of foreign capital have slowed markedly in recent years, providing little cushion to offset the impact of current account deficits on reserves. Inflows of foreign direct investment plunged from $5.1 billion in FY2007 to $1.6 billion in FY2011 and a scant $813 million in FY2012. Portfolio investment posted a $71.1 million outflow during the year.

The current account deficit and higher foreign debt repayment obligations pushed the balance of payments into a deficit that drew $4.7 billion from gross official reserves, leaving $11.9 billion in June 2012. The Pakistan rupee depreciated by 9 per cent against the US dollar in FY2012, while the real effective exchange rate appreciated by 4.6 per cent because of inflation differentials between Pakistan and its trading partners.

The report stated that Pakistan has potential for higher growth. Ample scope exists to improve agricultural productivity and expand manufacturing and services. The country has natural resources and a rapidly growing working-age population with a strategic location at the crossroads of Europe, Asia, and Africa. At present, security issues, energy shortages, financial imbalances, and governance concerns are holding the country back and undermining the business confidence needed to support a dynamic and growing private sector. While roadblocks appear daunting, sustained and deepened adjustment policies can allow Pakistan to realize its full potential, securing rapid and inclusive economic development.