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ADB lauds Pakistan’s economy; GDP up 4.1%, agri growth slips to 2.1%

ADB lauds Pakistan’s economy; GDP up 4.1%, agri growth slips to 2.1%

ISLAMABAD: The Asian Development Bank (ADB) has lauded the Pakistan government’s policies due to which economic conditions have been improved, budget deficit shrank and foreign exchange reserves strengthened, but it also exposed weak figures of economy.

According to the Asian Development Outlook Update 2014, Pakistan needs several years of concerted national commitment to make effective structural reforms for achieving high and inclusive growth as the country in recent years has endured low growth, chronic power deficits and large fiscal and external imbalances.

Preliminary estimates place GDP growth at 4.1% in FY2014 (ended 30 June 2014), up from 3.7% in FY2013 and higher than the 3.4% projected in ADO 2014.

The ADB said that upturn came from improved industrial performance: a pickup in construction by 11.3%, continued growth in large-scale manufacturing at 4.0%, and electricity supply improved by 3.7% owing largely to the government’s clearance of intra-industry debt.

Growth in large-scale manufacturing reflected higher production of fertilizer, electronics, chemicals, and leather, while textile production marginally declined.

More proactive policies on energy allocation and management adopted during the year helped industry grow. However, electricity and gas shortages will continue to limit growth and drain public finances for several more years, until further governance reform and new investment take effect.

Growth in services slipped to 4.3% in FY2014 from 4.9% a year earlier largely because growth in the finance and insurance sub sector and in general government services markedly slowed. Consumption expenditure picked up, however, boosting wholesale and retail trade.

Agriculture growth slipped to 2.1% from 2.9%, reflecting bad weather in areas that produce such minor crops as pulses and potatoes, as well as weaker growth in livestock, the latter of which accounts for 56% of agricultural production.

These developments outweighed strong expansion of 3.7% in major crops underlined by bumper harvests of rice, sugarcane, wheat, and maize-but not cotton, which suffered a small decline.

Private consumption remained the largest contributor to growth in FY2014 at 4.6 percentage points, helped by stronger remittances and improved rural incomes from major crops. The contribution of investment was a low 0.2 percentage points. A 0.5% increase in gross fixed capital formation came from a 17.3% expansion in general government investment, as private and public enterprise investment fell by 2.6%.

The ratio of fixed investment to GDP continued to decline, 3.7.1 Supply-side contributions to growth Percentage points Agriculture Services Industry Gross domestic product.

Economic trends and prospects in developing Asia: South Asia Pakistan 147 falling to 12.4% from 12.6% in FY2013 (Figure 3.7.2). Private and public enterprise investment in the various production sectors slipped to 9.9% of GDP.

Net exports turned negative, subtracting 0.7 percentage points from GDP as import growth outpaced export. Consumer price inflation accelerated to an average of 8.6% in FY2014 from 7.4% in the previous year. Year-on-year inflation was volatile, rising to 10.9% in November 2013, falling to 7.9% in January 2014, picking up again to 9.2% in April, and then falling again to 8.2% in June (Figure 3.7.3).

This largely tracked food inflation made volatile by short supplies of perishable items. Food inflation averaged 9.0% in FY2014 but ended the year at 7.4%. Following the increase in electricity tariffs in October 2013, nonfood inflation stabilized at around 9%, averaging 8.3% for the full year.

The ADB report said that consolidated government budget deficit was contained at 5.5% of GDP in FY 2014, down from an average of 8.0% over the past 3 years. The improvement was mainly from a significant increase in nontax revenues and a provincial cash surplus of 0.3% of GDP as provinces spent less on development-a measure for fiscal consolidation along with reduced power subsidies.

Total expenditure declined to 19.8% of GDP in FY2014 from 21.4% in FY2013. Current expenditure was 0.5% above the budgetary target for the year, reflecting overruns on subsidies and interest payments.

Subsidies were lower than in the previous year, by 0.3% of GDP, but surpassed the budgetary target by 0.4% of GDP notwithstanding significant power tariff increases during the year to bring income closer to cost recovery.

Savings from tariff increases were partly offset by larger power supplies that necessitated commensurate subsidy increases, turning a plus for the economy into a minus for the budget.

Interest payments increased by a marginal 0.1pc of GDP to 4.5pc, as interest rates on short-term domestic debt were higher than estimated.

The consolidated public sector development program was compressed to Rs 865 billion (3.4% of GDP) from the budgeted Rs 1,155 billion, and provincial development spending was reduced to nearly 30% below budget, or by 0.7% of GDP. Tax revenues fell short of their FY2014 target by 4.0pc.

Federal Board of Revenue (FBR) tax collection continued to be lower than targeted for another year because planned tax measures could not be fully implemented.

Non-tax revenues were 4.3pc over the budgeted amount, reflecting the one-time receipt of $1.5 billion from Saudi Arabia for project development and $1.1 billion from the auction of the 3G/4G mobile telecommunications spectrum in the last quarter, as well as a large profit remittance from the State Bank of Pakistan (the central bank).

Responding to inflation and pressures on the exchange rate in the first half of FY2014, the central bank increased its main policy rate in September and November by a cumulative 100 basis points to 10pc (Figure 3.7.4). It kept the policy rate unchanged in the second half of FY2014, even as inflationary expectations eased and the currency appreciated. Large foreign inflows during this period allowed the government to reduce budgetary borrowing from the central bank, which dropped to PRs197 billion in FY2014 from Rs 507 billion in 3.7.5 Budget borrowing from banks.

On gross disbursements, the amounts disbursed by banks either in Pakistan rupees or in foreign currency against loans during the month. It includes loans reprised, renewed, or rolled over during the month. In case of running finance, the disbursed amount means the maximum amount received by the borrower at any point during the month.

The current account deficit equaled 1.2% of GDP in FY 2014, marginally up from 1.1% in FY 2013 despite strong 13.7% growth in remittances from workers overseas (Figure 3.7.6).

The trade deficit widened by 7.7% as imports grew by 3.8%, reversing a decline of 0.5pc in FY 2013, and export growth remained modest at 1.5%. It is too early to gauge the benefits from preferential access to the European Union under Generalized System of Preferences Plus status, effective from 1st January 2014.

Exports of textiles, which account for somewhat over half of exports, grew by 6.4pc, reversing declines of 1.8pc and 0.6pc in the previous 2 years.

However, textiles appear to be the only export category to post a significant gain. The services account deficit widened, as inflows from the Coalition Support Fund were lower than in FY 2013.

The ADB report said that capital and financial inflows were very strong in the second half of FY 2014 with two notably successful eurobond placements, the one-off receipt of $1.5 billion from Saudi Arabia, and disbursements of program loans from multilateral agencies.

After 7 years without access to international capital markets, the government placed $2 billion in dollar-denominated eurobonds, half maturing in 5 years and the other half in 10 years, in offers that were substantially oversubscribed.

Reflecting the large capital inflows, net liquid official reserves swelled to $9.1 billion at the end of June 2014 from a low of $3.2 billion the previous January. Nevertheless, reserves remained low at the end of the fiscal year, cover for only 2.2 months of imports of goods and services.