Latest ADB report says Pakistan’s economic outlook uncertain with high risks on the downside

The ADB, in its April 2024 ‘Asian Development Outlook’ report that was released on Thursday, said that potential supply chain disruptions from the escalation of the conflict in the Middle East would weigh on the economy.

According to the Manila-based lending agency, with Pakistan’s large external financing requirements and weak external buffers, disbursement from multilateral and bilateral partners remains crucial.

The organization added that these inflows could be hampered by lapses in policy implementation.

It highlighted that support from the International Monetary Fund (IMF) for a medium-term reform agenda would considerably improve market sentiment and catalyse affordable external financing from other sources.

The ADB report projected that economic growth in Pakistan for the FY2025 would reach 2.8 percent, driven by higher confidence, reduced macroeconomic imbalances, adequate progress on structural reforms, greater political stability, and improved external conditions.

It said that growth was estimated to remain subdued during FY24 and pick up next year, provided economic reforms take effect.

Pakistan's real gross domestic product (GDP) was expected to grow by 1.9 percent in 2024, driven by a rebound in private sector investment linked to progress on reform measures and transition to a new and more stable government.

The report predicted that inflation will remain at about 25 percent this year, driven by higher energy prices, but was expected to ease in 2025.

The agency observed that while improvement in food supplies and moderation of inflation expectations would likely ease inflationary pressures, further increases in energy prices envisaged under the IMF Stand-By Agreement were projected to keep inflation high.

According to the ADB report, although improved supplies tempered food inflation, it remained high, driven largely by rising prices for energy and inputs to agriculture.

It said core inflation also remains elevated, reflecting domestic recovery and the pass-through of upward adjustments in energy prices.

Explaining the supply side, the ADB noted growth would be led by post-flood recovery in agriculture.

Output would rise from a low base on improved weather conditions and a government package of subsidised credit and farm inputs supporting expanded area under cultivation and improved yields, according to the report.

The report highlighted that higher farm output would help expand manufacturing, which would also benefit from the increased availability of critical imported inputs, while large-scale manufacturing expanded in three of the first six months of 2024.

The ADB report said the relaxation of import restrictions, coupled with economic recovery, was expected to widen the current account deficit.

However, the current account deficit was projected to widen to 1.5 percent of GDP in 2024 as imports were expected to expand during the year as domestic demand strengthened and the stabilisation of the currency market made it easier for firms to import inputs.

Pakistan would continue to face challenges from substantial new external financing requirements and the rollover of old debt, exacerbated by tight global financial conditions, the report mentioned.

According to ADB, tax collection in the country increased by 29.5 percent, as reforms in the personal income tax, higher taxes on property transfers, and the reintroduction of taxes on cash withdrawals from banks and the issuance of bonus shares raised direct tax collections.

The report pointed out that revenue mobilisation is expected to strengthen in the medium term, reflecting planned reforms to broaden the tax base.