Asian Development Bank sees Pakistan surpassing 4.5 percent growth target

ISLAMABAD (January 18 2003) : The Asian Development Bank has said that Pakistan has bright prospects to surpass the envisaged GDP growth rate of 4.5 percent in the current fiscal year.

However, due to high trend of expenditures the chances to stick to budgeted fiscal deficit of 4 percent seem bleak. Expected trade deficit of $ 1 billion due to higher imports could be missed.

ADB in its periodic Economic Update released on Friday, which assesses macroeconomic and policy developments, lauded the better prospects of growth.

The report refers to the monetary sector performance and real sector's bright scenario.

Growth in exports, revenue collection, industrial sector is a positive indicator, it said.

It also appreciated the reforms on police, legal and judicial aspects initiated by the government, apart from enacting freedom of information regulations.

The Bank's optimism is based on improved outlook for agriculture, manufacturing, and services sectors in the first five months of the year.

It says that both supply factors (better availability of water for agriculture and better placed textile industry after heavy investment in the past two years) and demand factors (larger remittances, lifting of ban on serving meals at weddings, and financial institutions aggressively marketing consumer credit) are expected to boost domestic economic activity.

The commitment of the new government to continue implementation of the economic policies and reforms implemented in the last three years augurs well for the prospects of further improvement in the economy.

According to the report, the government has implemented a comprehensive agenda of macroeconomic stabilisation, and economic and governance reforms in the last three years, the positive effects of which are now beginning to become apparent in terms of improvement in key macroeconomic indicators, including the fiscal deficit, the external account, and the external debt sustainability.

The policy of paying off short-term foreign exchange liabilities, pursued in the preceding two years, was continued in the first quarter of FY 2003, and these liabilities declined further by $421 million to $2.7 billion.

The first five months of FY 2003 witnessed positive trends in most commodity-producing sectors, improvement in fiscal position, and robust increases in both exports and imports.

Developments thus far indicate that the target of 4.5 percent growth in GDP in FY 2003 is likely to be attained, and possibly even surpassed.

The following paragraphs summarise the key findings of the report.


DOMESTIC SECTOR: Outlook for FY 2003 has improved, mainly because of expectation of better performance of the agriculture sector.

Output of two out of three major summer crops has been higher than last year and the outlook for winter crops also has improved due to better availability of water. The large increase in volume of textile exports in the first five months of FY 2003 augurs well for the performance of the textile industry.

In addition, several factors are likely to boost demand for manufacturing and other sectors.

The State Bank of Pakistan (SBP) continued to maintain an easy monetary stance in the first five months of FY 2003, and the rate of interest on 6-month treasury bills declined to 4.3 percent on December 11, 2002, compared with 6.3 percent as of end-June 2002.

Private sector credit seems to have picked up. The corporate debt market also remained active in the first quarter of FY 2003, and finances mobilised through term finance certificates almost doubled compared with the same quarter of FY 2002.

Share prices maintained a rising trend through most of the period, as continued increase in remittances, appreciation of the rupee, low interest rates, and absence of investment opportunities in real sectors raised the demand for equities.

Pakistan's fiscal position improved significantly in the first quarter of FY 2003, with the overall fiscal deficit decreasing to 1.0 percent of GDP compared with 1.7 percent in the corresponding quarter of FY 2002.

While increase in tax revenues is on track, increase in expenditure is on the high side, and if the current trend in expenditure continues, it will be difficult to achieve the fiscal deficit target of 4.0 percent for FY 2003.

EXTERNAL SECTOR: The sharp improvement in balance of payments observed in the last three quarters of FY 2002 continued into the first quarter of FY 2003, with the current account remaining in surplus.

Foreign exchange reserves held by SBP increased from $4,329 million as of end-June 2002 to $6,930 million by December 14, 2002.

If reserves held by commercial banks are included, total reserves rise to over $9 billion.

Recovery in exports and imports gained further momentum in the first five months of FY 2003, with exports increasing by 15.9 percent and imports by 13.7 percent.

With greater access to the European Union markets and increased production by the textile industry, export target of 13.4 percent for the full FY 2003 looks achievable.

As the economy picks up, imports are likely to substantially exceed the growth target of 7.4 percent, resulting in a somewhat larger trade deficit than the target of $1 billion set in the beginning of the year.

However, because of larger amount of remittances, Pakistan should still end the year with a comfortable surplus in the current account of the balance of payments.

II. ECONOMIC POLICIES AND REFORMS As a part of its ongoing reform program, the Government has taken a number of initiatives in the first five months of FY 2003, particularly in the area of tax administration, legal and judicial system, and freedom of information.

Implementation of tax administration reforms, which had been lagging behind, has picked up recently.

The Central Board of Revenue (CBR) has taken some important steps, which include setting up of a Large Taxpayers Unit in Karachi, a Model Income Tax Unit in Lahore, Sales Tax Automated Refund Repository, preparation of Customs Administration Reform Plan, and development of a new recruitment, training and promotion policy.

These measures aim at improving services for taxpayers through reorganisation of the CBR on functional lines and automation of processing of tax returns and applications for tax refunds, as well as improving the skill mix of the CBR staff through merit-based recruitment and training.

The Government has taken a number of very significant steps to implement police, legal and judicial reforms.

Major recent reform initiatives include:

(1) issuance of the Police Order in August 2002 by the President to reconstruct and regulate police;

(2) amendment of the Family Courts Act in October 2002 to reduce delays in resolution of family disputes;

(3) enactment of the law to establish Small Causes Courts in June 2002 to provide citizens access to speedy and cheap justice in minor cases;

(3) changes in laws to empower session judges in each district to provide relief against unlawful imprisonment; and

(4) designation of principal officers in all federal Government departments for dealing with public grievances.

The Government promulgated the Freedom of Information Ordinance (FIO) 2002 on 14 October 2002.

Under this law, with a few exceptions, all records of the Federal Government departments and its organisations related to transactions involving acquisition and disposal of property, expenditure, grant of licences, allotments, and contracts have been declared to be public record and are to be provided to citizens at a reasonable cost, when requested.

III. RECENT POVERTY REDUCTION INITIATIVES The Government is committed to increase pro-poor budgetary expenditures, and the trend of robust increases in expenditure on education and health in the second half of FY 2002, continued in the first quarter of FY 2003.

Expenditure on education was 25.8 percent higher than in the corresponding quarter of FY 2002 and that on health was 44.0 percent higher.

Expenditure on irrigation, another sector for pro-poor expenditure, increased sharply.

Disbursement of micro credit through the Khushhali Bank, Pakistan Poverty Alleviation Fund, and Agricultural Development Bank of Pakistan, taken together, also increased substantially in FY 2002 and the first quarter of FY 2003.

IV. OUTLOOK Prospects of realising, and possibly surpassing, the Government projected growth rate of 4.5 percent in FY 2003 mentioned in our last Economic Update are quite bright.

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