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In a recent report by the Asian Development Bank (ADB), Pakistan’s economic outlook appears increasingly challenging as it stands out as an outlier in Asia. The report predicts that Pakistan will experience the highest inflation rate while having the fourth lowest economic growth rate among all 46 economies in the region.
The Asia Development Outlook, the flagship publication of ADB, has revised downward the country’s economic growth forecast to a meager 1.9%. Simultaneously, it has significantly increased the inflation projection to a staggering 25% for the current fiscal year.
One of the key recommendations from the report is the need for Pakistan to implement a fiscal consolidation plan. This plan would involve limited spending on defense and energy subsidies and is expected to help mitigate the economic challenges faced by the country. Moreover, the report anticipates further increases in interest rates as part of these measures.
One striking observation in the report is the significant devaluation of Pakistan’s currency, which has seen a steep decline of 30%. Unlike other economies in the region, Pakistan experienced a decline in foreign remittances, further complicating its economic situation.
The report emphasizes that Pakistan faces exceptionally high downside risks to its economic outlook. Previously, Pakistan’s economic struggles were more localized within the South Asia region. However, the continued deterioration in economic conditions has placed the country near the bottom of the Asian economies.
Regarding inflation, the report projects that in the next fiscal year (FY2024), inflation is forecasted to remain at a high 25%, sharply higher than the earlier 15% projection. This inflation rate is not only significantly higher than the target set by the central bank but also the highest among all Asian economies, far exceeding the projected 10% for any other economy.
The report attributes part of Pakistan’s economic woes to efforts to control the exchange rate administratively, leading to the emergence of a parallel foreign exchange market with a substantial premium over the official exchange rate. This, in turn, resulted in a further tightening of foreign currency liquidity in the interbank market, contributing to a decline in recorded workers’ remittances.
While some countries in the region have seen increases in net personal transfers, Pakistan experienced a decrease of 17%, reflecting the challenges it faces in attracting foreign funds.
The report does offer a glimmer of hope, suggesting that normalized food supplies and lower inflation expectations, combined with higher power and gas tariffs and possible currency depreciation, could somewhat ease inflation in FY2024. However, Pakistan’s inflation rate is still expected to remain at a staggering 25%, substantially higher than the earlier forecast.
In terms of economic growth, the ADB has revised Pakistan’s growth forecast for this fiscal year to a modest 1.9%, lower than the official target of 3.5%. The growth projection is contingent on the implementation of reforms, supportive macroeconomic policies, recovery from supply shocks induced by flooding, and improving external conditions. Political stability following general elections later in the year is expected to boost business confidence, as will the new standby arrangement with the International Monetary Fund (IMF) to support economic stabilization.
However, the report cautions that uncertainty will persist, and fiscal and monetary tightening will limit demand due to double-digit inflation.
In conclusion, Pakistan’s economic challenges, including high inflation and sluggish growth, are a cause for concern. The ADB report underscores the need for comprehensive fiscal measures, controlled spending, and a focus on reducing inflation to stabilize the country’s economy.
