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Inflation expected to rise sharply in Pakistan: ADB report

April 4, 2019
Inflation expected to rise sharply in Pakistan: ADB report

Pakistan’s GDP growth will slowdown further to 3.9% in fiscal year 2019 as macroeconomic challenges continue despite steps to tighten the fiscal and monetary policies to rein in high and unsustainable twin deficits, the Asian Development Bank forecast in a report published on Wednesday.

“Until macroeconomic imbalances are alleviated, the outlook is for slower growth, higher inflation, pressure on the currency and heavy external financing needed to maintain even a minimal cushion of foreign exchange reserves,” reads the Asian Development Outlook 2019.

To meet its large financing needs, the government is discussing a macroeconomic stabilisation programe with the IMF in addition to arranging financial assistance and oil credit facilities from bilateral sources, the report added.

“Financing a high current account deficit in FY19 will require substantial borrowings as in the first seven months of the year and use of much of the bilateral lending support announced in the early months of 2019 to finance the deficit in the balance of payments,” it added.

Related: Islamabad university students plan to create 10,000 jobs in Pakistan

According to the ADB report, foreign exchange reserves depleted to $8.1 billion in February, 2019 and are likely to remain stressed till the end of the fiscal year.

An international lender, speaking about the rising inflation in Pakistan, said that average inflation accelerated sharply from 3.8% in the first 8 months of FY18 to 6.5% in the same period of FY19.

“Despite tighter monetary policy and lower international oil prices, inflation is expected to rise sharply to average 7.5% in FY19, driven up by continued heavy government borrowing from the central bank, hikes to domestic gas and electricity tariffs, an increase in regulatory duties on luxury imports and the lagged impact of currency depreciation by more than 10.7% since July 2018,” said the report.

ADB expressed concerns on the rising budget deficit. It said that the total revenue declined by nearly 2.4% in the first half of FY19 while budget expenditures increased by 5.5% in the same period.

“The current account deficit is expected to ease in FY19 but will remain high at the equivalent of 5% of the GDP because of the large trade deficit, the report said.

What can Pakistan do?

ADB suggested Pakistan needs to improve business competitiveness to boost its exports and the overall business environment.

“Pakistan ranks 107 out of the 140 economies on the Global Competitiveness Index 2018. Pakistan lags behind the South Asia regional average on most index indicators,” the report added.

The country’s persistently low score and ranking on the index is reflected in its companies struggles to compete in international markets and in weak export opportunities, which spark recurring crises in the balance of payments.

Related: ‘Influence of elite is a big problem for Pakistan’s economy’

According to the report, agricultural commodities and textiles and other manufacturers with little value added comprise over 80% of the exports. It said that the high cost of doing business is a key factor limiting the ability of firms to compete.

The government, however, is currently preparing its 5-year Strategic Trade Policy Framework with the objective of boosting export competitiveness. The framework will address the issues that hinder not only export competitiveness but also the creation of a more competitive domestic industry.

The ADB hailed Prime Minister Imran Khan’s decision regarding the announcement of a more liberal e-visa policy for foreign visitors from 175 countries. Continued fiscal consolidation in FY20 will keep growth subdued at 3.6 %, ADB predicted in its report.

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