Sinking like a rock: Slim chances of recovery for Pakistan’s directionless economy, says ADB
In its Asian Development Outlook, the Manila-based lending agency has painted an extremely bleak picture of Pakistan’s economy that is “directionless” and immediate recovery chances are almost nil amid a worsening balance of payments position.
“A difficult political situation stalled effective policy response to macroeconomic and structural problems, especially regarding energy, and the end of the government’s 5-year term in mid-March limited political scope for major policy or structural reforms,” it said.
The economic developments in this fiscal year are unfolding along broadly similar lines as previous year, but with “deepening concerns about sustainability and the adequacy of forex reserves”.
A missing link in the ADB’s analysis of political failures is the role of bureaucrats in running the affairs of the government who often do not disclose actual extent of problems to the leadership.
The ADB’s fears about policy inaction are becoming true as caretaker Prime Minister Mir Hazar Khan Khoso has not been able to appoint a finance minister and no concrete measures have been taken on the economic front.
How much the government is sincere about addressing sluggish growth prospects, as highlighted by the ADB, can be gauged from the fact that so far three briefings on the economy have been given to the premier and the Planning Commission deputy chairman was missing in all meetings. “PM’s Principal Secretary Seerat Asgar is not giving him an appointment despite repeated attempts,” said a PC official.
Highlighting flaws in the growth model, the ADB said private consumption expenditure expanded by 11.6% in the last fiscal year that provided nearly all GDP growth. The consumption benefited from rising remittances and government salary increases.
The shift to consumption-based growth was because of a constant fall in fixed investment that fell for the fourth year in a row to 10.9% of GDP, the lowest since 1974 and the lowest among major Asian countries, the ADB said.
“The steady decline in investment, coupled with reliance on consumption for growth, is unsustainable and undermines future growth prospects,” the lending agency warned. In just one year, the declining investment shaved off 1.4 percentage points from growth.
According to the ADB, last year was the fifth consecutive year of low growth, falling investment, excessive fiscal deficits, high inflation and a deteriorating external position that weighed heavily on the economy.
The analysis seems a report card on the economic performance of the previous government, which completed its tenure on March 16 and changed five finance ministers during its rule.
On the back of low capital inflows and heavy debt repayments, the ADB assessed significant downside risks to future outlook. Low foreign reserves, which covered less than two months of imports in February this year, spark concern over sustainability of the external sector.
“Pressure on reserves is expected to continue, with an additional $1.7 billion due to the IMF before the end of fiscal year 2013 and $3.2 billion payments during the next fiscal year 2014,” the ADB said. The exchange rate will remain under pressure also in the next fiscal year.
The agency projected 3.6% growth for the current year, but said without energy sector reforms, Pakistan will not be able to achieve 7% growth, required to accommodate bulk of the youth looking for jobs. The Planning Commission’s Framework for Economic Growth also talks about 7% growth rate, but it has remained unimplemented.
On expectation that there will be no substantive improvement in the country’s fiscal and energy imbalances in FY14, inflation is expected to edge up to 9.5% and this year’s budget deficit will be at 7.5% excluding electricity arrears.
When the ADB was painting a gloomy picture of Pakistan’s economy, at the same time it found Asian economies returning to healthy growth.