Pakistan Real GDP growth @ 8%

Real GDP growth should be sustained at eight percent per year: ADB advises Pakistan

Asian Development Bank advised the Pakistan government that Real GDP growth, remained sustained at 8% per year, over 2010-2020, while credit to the private sector, from the banking sector, expanded to 42% of GDP by 2018. The manufacturing sector's share of the GDP increased by 30%, by 2020. High value-added output share of exports increased to 40% of GDP by 2020.
An update review of the Asian Development Bank on "Macroeconomic Developments and Prospects" revealed that the crisis had a major impact on financial markets, with the Karachi stock index plunging by 57% in 2008. To halt the steep decline, the Karachi Stock Exchange Board imposed a floor on stock prices in August 2008. This was eliminated in December.
To revive the market after the floor was lifted, the National Investment Trust (the government-owned and largest money manager in Pakistan) invested about Rs 7 billion in the Rs 20 billion State Enterprise Fund, which is investing in the stock market. The market subsequently rallied and bounced back to pre-crisis levels. Increased confidence and improved terms of trade helped stabilise the rupee at around Rs 80, to the dollar, since October 2008 and enabled the SBP to rebuild its gross international reserves.
According to the ADB report, the banking system remains relatively well capitalised, but gross nonperforming loans have increased from 7% in 2007 to about 9.1% of all loans and banks' profitability has declined by about 24%, from the previous year, (reflecting, in part, the mounting provisioning requirements in response to the rise in nonperforming loans).
Domestic pressures and the global financial crisis have led to greater dollarisation and a continued outflow from the system, which contributes to deteriorating liquidity conditions. In response to liquidity pressures, in October 2008, the SBP reduced the reserve requirement by 4 percentage points and eased liquidity requirements.
To ease the strains on banks and other deposit institutions, the SBP slowed a mandated rise in paid-in capital, for 2013, from a planned Rs 23 billion to Rs 10 billion (with an annual increase of Rs 1 billion per year from 2009 through 2013). The capital adequacy requirement of 10% has not been affected. According to an ADB report, Real GDP growth dropped to 4.1% in FY2008, after 5 years of averaging near 7%.
Significant factors constraining growth have been a sharp decline in the growth of private investment, due to political uncertainty, a worsening security situation, and the impact of high international oil prices and frequent power shortages. The contribution of investment to growth fell to just 0.7 percentage points in FY2008, compared to 2.7 percentage points in the preceding fiscal year.
The contribution of net exports to growth turned negative, especially due to the oil price hike and the continued slowdown in textile exports, and the manufacturing sector's contribution was expected to turn negative for the current fiscal year. When combined with the failure to align domestic prices with international prices, the oil price shock and high wheat import price led to a massive build up of unbudgeted and untargeted subsidies and resulted in a fiscal deficit for FY2008 of 7.6% of GDP-the highest in 9 years.
Also, interest payments on Defence Savings Certificates, which were issued in the 1990s with high interest rates, steeply increased interest costs and contributed to the larger deficit. In the absence of additional foreign inflows (eg, investments and remittances), the deficit had to be financed, mainly through domestic borrowing from the SBP.
Development spending was compressed, relative to that planned in the budget, to offset some of the impact from the untargeted subsidies. The tax-to-GDP ratio came in at 10.6%, more than half a percentage point lower than projected in the budget.
Subsidies on oil, food, fertiliser, and power contributed to the budget deficit, but failed to contain inflation, as food prices soared and the price of fuel was adjusted upward in the last 4 months of FY2008. Steep rupee depreciation stoked inflationary pressures, as did financing of the expanding deficit through borrowing from the SBP.
The consumer price index, on a year-on year basis, climbed to 21.5% in June 2008 and to 25.3% in August, which was the highest in 30 years. Core inflation also increased. As food prices rose sharply (by 32% in June 2008 year-on year), the poorest groups in society were hardest hit. With declining international commodity prices and a slowing domestic economy, the year-on-year consumer price index fell to 20.5% and food inflation to 21.6% in January 2009.
Domestic inflation would have fallen by more had the rupee not depreciated by 15.9% against the dollar in the first 7 months of FY2009, the ADB report added. Reacting to the rising inflation and the sharp increase in imports, the ADB review pointed out, that the SBP tightened monetary policy three times in FY2008 for a cumulative rise in its discount rate of 250 basis points.
That rate climbed by another 300 basis points to 15% (the highest in South Asia) by November 2008, under the IMF program as inflation persisted, the drain on reserves continued, and the Government sought to reduce its SBP borrowings by making treasury bills more attractive to commercial banks. By April 2009, inflation had slowed to less than 17.2%, compared with the record 25% level in the last quarter of 2008. This enabled the SBP to reduce the discount rate by 100 basis points.
The fiscal deficit is expected to decline to 4.3% of GDP in FY2009, as the Government has removed or reduced subsidies and rationalised development expenditure. It already has fully eliminated the subsidy on petroleum products and is undertaking a phased reduction in the electricity subsidy, with the target to terminate this subsidy by the end of FY2009.
A reprioritisation of projects is expected to lead to a slashing of the development budget by over Rs 100 billion for FY2009. The Government has also frozen supplementary grants to various departments to infuse greater fiscal discipline. Fiscal performance for June 2008-March 2009 suggests that the annual target is achievable.
While the slowdown in economic activity, in response to the global financial crisis, has reduced revenue growth below earlier projections, reflecting in part lower sales tax revenues with the decline in imports, revenue from the petroleum development levy and compressed expenditures will hold the deficit to the targeted 4.3% for FY2009.
Growth is expected to slow to 2.0% in FY2009 due to the global slowdown, the Government's tight demand management policies, and infrastructure deficits. GDP growth could rise to about 3.0% in FY2010. But there are considerable downside risks, including the worsening security situation, the ADB report mentioned.
Highlighting the "Prospects for FY2010", the ADB mentioned that the strains on the fiscal deficit for FY2009 have been reduced. The reduction in international commodity prices (especially for wheat and oil) will generate considerable fiscal space. Additional factors, important for the 2010 fiscal outlook, include:
(i) Measures will be introduced, for FY2010, to strengthen revenue collections, including improvements to both policies and administration.
(ii) The Government has undertaken a rationalisation and review of development spending.
(iii) The fiscal space generated by recent policy changes has to be viewed in the context of the substantially increased risk to Pakistan's economic performance appearing in the recent months. Social safety net requirements can be expected to expand considerably.
Not only has unemployment increased, but a substantial number of citizens have been displaced as a result of intensified internal conflict. Security and defence spending will necessarily rise. Real growth could be further reduced, particularly if intensified conflict substantially impacts on agricultural activity.
(iv) The donor meeting in April 2009 resulted in commitments for additional support to shore up development activity and to reflect the increase in social support that would be needed. The original deficit target for FY2010 of 3.4% has been loosened to accommodate up to 1.2% of GDP in additional donor support.

Courtesy: Business Recoder