Pakistan's economic outlook uncertain amid political instability: ADB report

This uncertainty could jeopardize the sustainability of efforts aimed at stabilizing and reforming the economy, reported Pakistani news publication Dawn.

The 'Asian Development Outlook' for April 2024, issued by the Manila-based lending institution, underscored the possibility of supply chain disruptions stemming from increased conflicts in the Middle East, which could have adverse effects on Pakistan's economy.

With Pakistan leaning significantly on external financing and having weak reserves, the ADB stressed the critical role of ongoing support from both multilateral and bilateral partners.

However, it warned that hurdles in policy implementation might impede the flow of such assistance.

The ADB stressed that endorsement from the International Monetary Fund (IMF) for a medium-term reform agenda would significantly bolster market confidence and ease the flow of accessible external financing from other channels.

According to the report, economic growth in Pakistan for FY2025 is projected to reach 2.8 percent, propelled by increased confidence, reduced macroeconomic imbalances, substantial progress on structural reforms, enhanced political stability, and improved external circumstances.

However, FY24’s slow growth could pick up the following year, depending on the effective implementation of economic reforms.

Furthermore, real gross domestic product (GDP) is expected to expand by 1.9 percent in 2024, primarily due to a resurgence in private sector investment associated with advancements in reform initiatives and the transition to a new, more stable government.

The report also forecasts that inflation will hover around 25 percent this year, driven by elevated energy prices, but is expected to alleviate in 2025.

While improvements in food supplies and a moderation of inflation expectations could ease inflationary pressures, the report observed that ongoing increases in energy prices, as outlined in the IMF Stand-By Agreement, are likely to keep inflation elevated.

Food inflation remained high despite improved supplies, primarily due to escalating energy prices and increased costs for agricultural inputs. Core inflation also stayed elevated, reflecting the domestic economic recovery and the pass-through effect of higher energy prices, according to the ADB.

On the supply side, the report noted that agricultural growth would be driven by post-flood recovery efforts.

It anticipated output to increase from a low base due to improved weather conditions and government initiatives such as subsidized credit and agricultural inputs, which would support expanded cultivation areas and improved yields.

The expansion in farm output is expected to bolster manufacturing, benefiting from increased availability of crucial imported inputs.

The report highlighted that large-scale manufacturing saw growth in three out of the first six months of 2024.

Regarding trade, the relaxation of import restrictions coupled with economic recovery is predicted to widen the current account deficit.

Imports are predicted to increase as domestic demand strengthens and currency market stabilization facilitates easier importation of inputs.

Consequently, the current account deficit is expected to widen to 1.5 percent of GDP in 2024.

The report highlighted that Pakistan will continue to grapple with challenges stemming from substantial new external financing needs and the rollover of existing debt, worsened by tight global financial conditions.

Furthermore, the ADB noted a significant increase in tax collection by 29.5 percent due to reforms in personal income tax, higher property transfer taxes, and the reintroduction of taxes on bank withdrawals and bonus share issuance.

It anticipates further strengthening of revenue mobilisation in the medium term through planned tax base broadening reforms.