ISLAMABAD - Asian Development Bank, in its recent report, forecasted that Pakistans GDP growth would modestly improve to 3.0 percent in the ongoing year of 2010 due to recovery in the manufacturing sector. According to Asian Development Outlook 2010 (ADO 2010), released on Tuesday, the recovery in manufacturing sector is due to higher production of the cement products in the local market and stronger domestic demand for automobiles in the first half of 2010. Textiles manufacturing, however, has continued to show decline on account of the lower cotton availability, electricity and gas shortages and poorer relative product competitiveness in the international markets. The ADO further said that Pakistans economic prospects were predicated on the basis of a successful completion of the current IMF programme by end-2010; a gradual improvement in the security situation; a phased reduction in electricity shortages, as tariffs meet cost of supply and new power plants were commissioned; sustained implementation of fiscal reforms, particularly for tax and administration; a gradual economic recovery in the main trading partners and political stability. The GDP growth is expected to reach about 4.0 percent in the fiscal year 2011, as the private sector investment picks up following gradual improvement in the security situation and fewer electricity shortages, as public investment accelerates, supported by an improved fiscal situation with the Value-Added Tax (VAT) and other administrative tax reforms from 1 July 2010. The modest growth projected for 2010 will make it hard for the Federal Board of Revenue to achieve its revenue target. However, higher oil and electricity prices (by way of larger customs revenues and sales tax receipts) will compensate somewhat for lower direct tax collections. Yet with higher than budgeted defence spending, the fiscal deficit target of 4.9 percent of GDP for 2010 will be missed, and the Government is now targeting a deficit of 5.1 percent. But this too could be overshot in case of further shortfalls in tax and non-tax revenues. The ADO said that inflation in 2010 is projected at 12 percent from its peak of the previous fiscal year. Looking ahead, domestic oil prices will increase in line with international prices. Similarly, phased increases in electricity tariffs will also contribute to maintaining momentum in inflation during the fiscal year. Agricultural growth in 2010 is set to remain below than the Governments target owing to lower production of most major crops, such as sugarcane and cotton. Production of wheat will be less than the target of 25 million tons due to water and seed shortages, delayed sowing, and higher input costs. Exports are predicted to contract once more in 2010, although only by 1.4 percent. Inflation will limit depreciation of the real effective exchange rate and block increased export price competitiveness. Imports, too, will decline in 2010 by about 2.4 percent from their level in 2009 because of continued suppressed investment and economic activity. Backed by the still robust remittance inflows (up by 17.7 percent in the first 8 months), the current account deficit in 2010 is projected to fall to 3.6 percent of GDP from 5.6 percent of GDP a year earlier. The current account deficit is expected to rise in 2011 to 4.2 percent of GDP, as imports grow by about 7.1 percent owing to recovery in non-oil imports on account of stronger economic activity. Higher imports in 2011 will, however, be offset to an extent by projected 4.2 percent growth in exports. With FDI down sharply in the first 8 months of the fiscal year, financing the current account deficit will continue to depend heavily on debt-creating inflows from multilateral agencies, including FODP commitments. From 2011, non-debt-creating inflows, such as foreign direct investment and privatisation proceeds, could assume a greater share of such financing but the outlook remains uncertain and debt sustainability remains a major concern. At the end, the ADO stated the Pakistan was interconnected development challenges. The first challenge is its weak fiscal situation, marked by underperformance in Government revenue over the years. The second is low growth and the challenge to revive it so as to create jobs and reduce poverty. The third is to improve the competitiveness of the economy so as to expand exports, sustain growth, and avoid balance-of-payments problems in the future.