Pak economy to grow 3 per cent in FY10, predicts ADB

KARACHI - A modest revival in Pakistans economic growth to about 3 per cent is projected for FY2010, in an anticipation of good agricultural and industrial growth, says ADB report. The Asian Development Bank released Asian Development Outlook 2009 Update on Wednesday, according to which agriculture is expected to continue its strong growth on the back of higher procurement prices for the main crops and increased public spending in the sector as announced in the budget. But agricultural growth will not be as high as in FY2009 due to the high base effect and continued water scarcity that will limit crop expansion. Report stated that growth in industry is expected to turn marginally positive in FY2010 as the commissioning of new power plants reduces electricity outages, and as adjustments in power tariffs generate cash flow for power companies to expand their operations. The pace of growth in the main exporting industrial sub-sectors, such as textiles, will depend on the extent of a pickup in consumer spending in main trading partners. The services sector is expected to post moderate growth in FY2010 on the back of good agricultural growth and the modest pickup in industry. Pakistans economic outlook in FY2010 will be shaped by both internal policies and global economic developments. Internally, economic outcomes will depend on the Governments ability to achieve the desired balance between fiscal consolidation and revival of growth. Externally, the outlook will depend on the degree of improvement in major trading partners; the consequent impact on Pakistans exports and on receipts of workers remittances; and developments in global oil prices, said report. To fuel expansion, the Government has set a fiscal deficit target of 4.9pc of GDP in the budget for FY2010, a level higher than the 3.4pc of GDP originally targeted under the standby arrangement. Of the new fiscal deficit target, up to 1.2 per cent of GDP of additional financing is expected to be made available under the pledges made by donors at the Friends of Democratic Pakistan meeting in Tokyo in April 2009. This pledged assistance is to provide the fiscal space necessary for implementing a counter-cyclical response in the form of higher development spending, report added. ADB showed concerns over the lingering power crisis. Both immediate and long-term measures are required to address the crisis including improving governance; reducing leakages and losses; rationalizing electricity tariffs to cover sector costs and eliminate subsidies; and resolving the problem of circular debt, which has drained the finances of the power companies and has forced cuts in their operations and investments. Report indicated that multilateral development partners are supporting power sector reforms and are financing critical investments to improve and augment electricity transmission, distribution, and generation systems. However, the size and effectiveness of this assistance will depend on the Governments ability to implement its reform agenda. Global recession, if prolonged, poses an obvious risk to Pakistans economic recovery and stabilization through weakening exports, workers remittances, and inflows of private capital. It is critical that the pledges made by donors in Tokyo are realized to finance the PSDP in support of Pakistans growth and poverty reduction strategy. Finally, revival of higher growth is predicated on continued improvement in the domestic security situation, which is critically important to foster both domestic and foreign investment and to strengthen private sector participation in key sectors of the economy, report said. Report anticipated a massive 54 per cent hike is planned for the PSDP in FY2010. The Government in FY2010 also plans additional spending of 0.3 per cent of GDP funded by donor grants to support rehabilitation of internally displaced people in areas affected by operations against militants. Report mentioned that development expenditure is set to increase by 1.6 percentage points of GDP in FY2010, while additional receipts to be raised by the FBR amount to 0.4 percentage points of GDP. The external resource requirement in the budget is therefore large and equivalent to about 80pc of the planned PSDP, indicating an unsustainable dependence on foreign inflows. A failure to obtain external resources at the planned level could consequently lead, once more, to a sharp drop in development spending. As per the ADB assumptions, the services account is projected to improve, mainly reflecting higher logistical payments. It is uncertain whether the trend increase in workers remittances will be sustained. However, based on the continued strong growth of workers of 25 per cent in the first 2 months of FY2010 and evidence of strong numbers of workers proceeding abroad for employment, workers remittances are assumed to hold steady in FY2010. The current account deficit is expected to be 4.8% of GDP in FY2010, somewhat improved from a year earlier. As non-debt-creating inflows in the form of new foreign direct and portfolio investment remain little improved in FY2010, the financing of the current account deficit will need to continue relying on debt-creating inflows. These will include financing through the standby arrangement, augmented by disbursements from development partners. The economic outlook carries downside risks and challenges. Although Pakistans economic imbalances were reduced in FY2010, structural improvements in the underlying fundamentals are needed, without which it will be difficult to sustain financial stability and growth. In particular, fiscal sustainability requires critical measures to improve revenue mobilization through broadening the tax base and removing exemptions, improving tax policy and administration, and quickly adopting a full-fledged value-added tax. Meeting the fiscal deficit target purely by cutting development expenditure is not a viable policy option for a country that requires large-scale spending on infrastructure and social sectors to sustain growth and reduce poverty.