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CWA # 1294, 6 May 2024
Pakistan Reader
Pakistan's Uncertain Economic Future: Five Takeaways from the ADB Report

  Rohini Reenum

The Asian Development Outlook April 2024, released by the Asian Development Bank, states that Pakistan’s economy “is uncertain, with high risks on the downside.” During the previous fiscal year - 2023, the economic performance was characterized by an overall contraction due to “devastating floods, political unrest and policy slippage.”  

1. Economic growth will be “subdued” in FY 2024 and will “pick-up” in FY 2025.
The pick-up in economic growth will depend on the “progress on reform measures” taking effect and the “transition to a more stable government.” Supply-side growth is also projected to improve due to the “post-flood recovery” in agriculture due to subsidized government credit and the availability of critical imported inputs. Large-scale manufacturing has already seen an expansion in the first six months of FY 2024, and recovery in industrial output is expected in the latter half of the year.

2. Inflationary pressures to continue
Average inflation surged to a five-year high - 29.2 per cent in FY 2023, leading to currency depreciation and higher costs of living, placing an additional burden on people. This also meant less saving capacity, which was reflected in low levels of private consumption. The inflation was primarily driven by “supply disruptions from floods and import controls.” Inflation is projected to remain high at 25 per cent in FY 2024 due to anticipated increases in energy prices under the International Monetary Fund’s Stand-by Arrangement (SBA) and high costs of inputs to agriculture. This is despite improvement in food supplies that had driven headline inflation earlier. Headline inflation is projected to drop to 15 per cent in FY 2025 “as progress on macroeconomic stabilization restores confidence.”

3. Current Account Deficit will remain an intractable problem 
There was a sharp decline, almost 87 per cent, in the Current Account Deficit (CAD) in FY 2023 as the Central Bank’s “restrictions on foreign exchange” bore fruit. This was an important policy decision, keeping in mind the rapidly depleting foreign reserves of the country. However, restrictions and import controls impacted the availability of “raw materials and intermediate inputs” crucial for exports. Combined with “food-related crops,” this adversely impacted exports. Despite a drop in the current account deficit, Pakistan’s foreign exchange reserves “declined to critically low levels” due to the country’s high obligations towards external debt repayments. With an inability to secure adequate international funding for external debt-servicing and the suspension of IMF EFF, Pakistan had to rely on its foreign exchange reserves leading to its depletion. Compared to the last fiscal, the Current Account Deficit is expected to “widen” due to controls on imports being lifted and an overall economic recovery.

4. Fiscal deficit to improve in the medium-term
Despite efforts, the government missed the budget target for fiscal deficit set at 4.9 per cent in FY 2023 and the revised target set at 6.9 per cent, taking into account expenditure for flood relief and rehabilitation. The fiscal deficit, however, dropped slightly from 7.9 per cent in FY 2022 to 7.7 per cent in FY 2023. For FY 2024, the government has projected an improvement in the fiscal sphere in the medium term, supported by an increase in revenue and “rationalized spending.” 

5. Need for a policy change on financial inclusion of women 
According to the report, the rate of financial inclusion of women in Pakistan is one of the lowest in the world. This contrasts Pakistan’s overall financial inclusion situation, which has improved over the years. Some barriers are low female labour force participation, lack of formal income and proper documentation, low literacy levels, and insufficient financial education. While hailing the central bank’s Banking on Equality Policy, the report has pushed for “legal and regulatory change.” The report has also urged the provision of gender-inclusive opportunities and micro-finance for smaller enterprises.

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