Medium term outlook for economy in Pakistan seems Good: ADB
Pakistan Times Business & Commerce Desk

ISLAMABAD: The Pakistan Economic Update prepared by the Pakistan Resident Mission of the Asian Development Bank (ADB) provides an analysis of economic trends in Pakistan during the first three quarters of fiscal year 2005/06, and presents an outlook of the economy for the whole year.

ADB Country Director, Mr. Peter Fedon, said “the medium term outlook for the economy looks good and although economic growth decelerated in the first half of 2005/6, the economy is expected to still post robust growth for the full year.”

The Update notes the significant recent decline in poverty as estimated by the Government based on a sound methodology.

The Report also discusses recent poverty trends in the country and reviews poverty reducing public expenditure during the first half of 2005/6.

The Government continued to pursue an expansionary fiscal policy and the fiscal deficit increased. The increase in Government spending was mainly due to a sharp increase in development expenditure and payments for relief operations for victims of the October 2005 earthquake.

In agriculture, the cotton and sugarcane crops are estimated to be smaller than last year. The growth in most manufacturing items in the first seven months of the year was also lower.

Construction, however, continued to expand at a rapid pace. In the services sector, telecom services, financial sector, and wholesale and retail trade continued to show a robust growth.

A significant deceleration in food inflation was largely offset by a sharp increase in oil prices. Annualized overall inflation declined by one percentage point to 8.3 percent in the first ten months of 2005/06.

External trade continued to expand rapidly in the first three quarters of 2005/06, with imports increasing by 43.2 percent and exports by 18.6 percent. The growth of imports was led by petroleum and petroleum products, which together increased by 64.5 percent to $4.6 billion. Textile and clothing was the largest contributor to export growth.

There was an almost three-fold increase in foreign direct investment, partly because of higher privatization proceeds. The foreign exchange reserves held by SBP increased by $477 million to $10.3 billion, which are sufficient to finance 4.2 months of projected imports in the current year.

The deficit in the current account of the balance of payments almost quadrupled to $4.7 billion in the first three quarters of 2005/06, as imports grew rapidly. The increase in the current account deficit was largely offset by a sharp turnaround in the financial account. Pakistan’s external debt declined by $589 million to $35.2 billion in the first half of 2005/6.

In March 2006, the Government issued sovereign bonds for $500 million with tenures of 10 and 30 years. The bonds were heavily oversubscribed.

The ADB report highlights that the outlook for the economy is encouraging. Economic growth, although less than last year, will remain at a healthy rate of 6.0-6.5% in 2005/6. The growth in agriculture sector is expected to be sluggish, due to the smaller cotton and sugarcane crops as is the growth of the livestock sub-sector.

However, the large-scale manufacturing sector is projected to grow at a robust rate of 10.0 percent, as indicated by the sharp increase in imports of raw materials and rapid growth in private sector credit. In the services sector, telecom services, banking and trade are expected to sustain high growth in 2005/6.

With robust economic growth and a sharp increase in imports, the target for revenues is likely to be surpassed.

Expenditures are also projected to exceed the budget estimate. As a result, the budget deficit in 2005/6 could rise to 4.2 percent of GDP compared with the target of 3.8 percent. Imports are projected to increase by 30.0 percent, because of high oil prices and continued strong domestic demand.

The end of the quota regime since January 2005 and the robust growth in world trade will boost exports, which are expected to increase by 14.0 percent. The trade deficit is projected to increase to over $8.0 billion, and the current account deficit to $6.0-6.5 billion.●