Editorial

ADB prognosis

in its annual Asian Development Outlook report published recently, the Asian Development Bank noted that Pakistan would miss its fiscal year’s economic growth target. The GDP growth is expected to remain at 5.2%. Average consumer inflation is expected to accelerate to 4%due to a rebound in oil prices, higher domestic demand, and expanded government borrowing from the central bank. The ADB also expressed its doubts about the government’s ability to achieve the fiscal year’s 3.8% budget deficit target. The lending agency warned that Pakistan cannot avail full benefits of the China-Pakistan Economic Corridor (CPEC) without introducing drastic reforms in areas of energy, regulations and foreign currency regime. According to the report, continued reforms are a must to provide an enabling environment that facilitates businesses and fosters investment. Especially important are reforms to boost exports by diversifying products and markets and by adopting more flexible exchange rate policies to maintain external stability.
Analyzing the present economic scenario, ADB points out that Pakistan’s continuously falling exports reflect not only weak global demand and low international commodity prices but also domestic structural issues such as power outages, scant investment in modernization and currency parity level, all of which hamper competitiveness. Beyond that, a significant increase in the current account deficit could pose a risk to official exchange reserves, which peaked at $18.9 billion in October 2016 and then slid by $11.3 billion later in 2017. If expected disbursements from multilateral development partners in the remaining months of the fiscal year do not materialize, there will be further contraction in the official reserves.
Continued economic reform is essential to reach a high growth trajectory, but the problem is that investment continues to be at 15.1% of GDP, very low when compared with similar countries in the region. This constrains growth. It also apprehended that Pakistan cannot repay its debt arising out of CPEC obligations without attracting non-debt creating inflows and enhancing exports. However, Pakistan is currently implementing a contrasting policy. The government has been building foreign currency reserves by obtaining expensive foreign loans. ADB has suggested that to reap the potential benefits of CPEC and shift the economy of Pakistan to a higher growth trajectory, the government must continue to address key constraints on growth.
Domestic security has improved significantly in recent years, but consolidating the gains will take continued efforts. Higher foreign exchange earnings and exports will be needed to avoid pressure on the external account. According to the ADB’s assessment, the CPEC will address Pakistan’s infrastructure deficit caused by annual spending on infrastructure at only 2% to 3% of GDP in the past four decades. It is good that the government has identified ‘early harvest’ infrastructure projects that will be completed in the next few years. The ADB has strongly recommended that the government should lend policy support to CPEC implementation by maintaining macroeconomic stability and addressing structural issues that continue to inhibit exports. These are minimum essential requirements to achieve higher growth.