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Wednesday, February 14, 2024

Latest ADB report predicts a 2pc growth rate for Pakistan

According to ADB, during recovery from COVID-19, the priority should be to restore economic health by jumpstarting SMEs’ operations and improving their access to financial services.

The Asian Development Bank in its latest global outlook forecast on Wednesday for 2021 has said that Pakistan’s GDP would grow by two percent during the current year, depending upon two important factors.

According to the ADB, these two factors are successful vaccine rollout and implementation of stabilization measures.

It said, “The economy contracted in fiscal 2020 as COVID-19 restrictions and supply-chain disruption shrank industry and services. The downturn was worsened by currency depreciation and fiscal tightening. Growth is projected to rebound in the near term as restrictions ease,” adding, ”The pace of vaccine rollout and the fate of economic stabilization measures are key for restoring investor confidence. Measures to support the private sector, especially small and medium-sized enterprises, would support recovery.”

The economic outlook is subject to downside risks, depending on persistent containment measures and success in achieving the vaccination target of 70pc of the eligible population by the end of December 2021.

For 2022, the Asian lending organization has put Pakistan’s GDP growth to 4% based on increased consumption and more investor confidence.

The ADB’s forecast is higher than the 1.3pc growth forecast by the World Bank and 1.5pc by the IMF but lower than 2.9pc and 3pc growth estimates by the Ministry of Finance and State Bank of Pakistan, respectively.

Read More: ADB endorses a 5-year partnership strategy for Pakistan

The sector-wise outlook and forecast

The ADB said Pakistan’s agriculture was forecast to see slower growth, mainly because of a sharply lower cotton harvest following heavy rains, pest attacks, and continued contraction in cultivated areas. Other major crops, notably rice, sugarcane, and maize, look set to exceed output in FY2021 after the government-subsidized agricultural inputs and bank credit

According to the report, the performance of SMEs in the future is critical to Pakistan’s economic growth. The report mentions that in Fiscal Year (FY) 2020, Pakistan’s already declining sector in FY2019, the industrial sector saw getting hit even further in 2020 by contraction to 2.6% owing to the pandemic. The report added, “pandemic-related disruption worsened the impact of Pakistan rupee depreciation and fiscal tightening.”

Relating to Large-scale manufacturing (LSM), the ADB report for 2021 said, “Large-scale manufacturing was particularly hurt, but construction benefited from fiscal incentives and the fast-tracking of large infrastructure projects.”

However, the report says, “Industry and services already show signs of recovery in FY2021 with fiscal incentives granted to key construction and export industries and subsidized credit offered to protect employment and stimulate growth.” The report sheds light on LSM, which makes up half of the country’s industrial sector, as the major contributor to the reversal of the 2.6% contraction by expanding 3.2% in 7MFY21.

The industry expanded by 7.9 percent in 7MFY21 on the “back of businesses allied with construction and from the food-processing industry”, which was supported by increased wheat imports and increased sugarcane output. The report appreciates saying, “the government is fostering e-commerce to keep trade and commerce functioning despite COVID-19 disruption.”

According to the report, despite lower interest rates, inflation is projected to remain low at 8.7% during the ongoing fiscal year. For the 9MFY21 the inflation was 8.4%. It is projected to fall to 7.5% in FY2022.

The State Bank of Pakistan has kept its interest rate low at 7% to support economic recovery. This support is backed by lower inflation expectations by the people and a stable exchange rate. As the State Bank has announced earlier, the “Growth in private sector credit picked up in the first half of FY2021, led mainly by construction, wholesale and retail trade and consumer spending.”

Read More: IMF program wants Pakistan to increase taxes despite Covid-19

ADB report forecasted that the current account deficit is expected to narrow slightly to the equivalent of 1pc of GDP in FY2021 with support from robust remittances. The current account deficit is projected to widen again in FY2022 to equal 2pc of GDP on robust growth in imports as the recovery strengthens and a surge in remittances tapers.

The Asian Development Bank (ADB) report expects the investment to grow stronger as the international image for Pakistan improved and IMF releases its third tranche as agreed upon. The foreign reserves increased on the back of remittances, foreign aid and selling of securities(Eurobonds and Sukuk) in the international market, and have increased to $20.434 in March 2021.

The report said, “Assuming that stabilization efforts are sustained and economic recovery is timely, public debt is expected to fall as a percentage of GDP.”

Policy Challenges

The ADB report suggests that during recovery from COVID-19, the priority should be to restore economic health by jumpstarting SMEs’ operations and improving their access to financial services. It adds the fact that the pandemic has exposed the prevalence of informal SMEs in Pakistan.

It says, “An estimated 3.3 million SMEs in Pakistan engage some 40 million households in entrepreneurial activity,” however only contribute to 30% of GDP compared to other countries 60%.

Such low economic share reflects, “their low-value addition in a challenging macroeconomic environment with scarce credit, high inflation, an unstable currency, and inadequate infrastructure.”

Read More: IMF cannot dictate policies to institutions in Pakistan, Teresa Daban

The policies such as digitization of SMEs, increasing their global accessibility, and provision of data-driven solutions were suggested by the ADB’s economic outlook report.