ADB Warns of Political Instability in Pakistan as Key Risk to Economic Reform

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The Asian Development Bank (ADB) has issued a warning about the persistent political instability in Pakistan, stating that it will continue to pose a significant risk to the implementation of economic reforms. The ADB’s latest report emphasizes the importance of Pakistan’s adherence to an economic adjustment program as the country seeks to restore stability and achieve gradual growth.

According to the Asian Development Outlook September 2023 report, Pakistan’s expansionary fiscal and monetary policies have reached their limits, resulting in a decline in growth, an increase in inflation, a weakening of the rupee, and a shrinking of international reserves.

The report projects a moderate GDP growth of 1.9% in FY2024, with elevated price pressures. It also highlights potential external risks, such as tighter global financial conditions and supply chain disruptions due to the ongoing Russian invasion of Ukraine.

Amid the election season, the report warns that political instability will remain a key risk to implementing reform and achieving growth stabilization, confidence restoration, and sustainable debt. The report emphasizes the importance of disbursement from multilateral and bilateral partners for reserve accumulation, exchange rate stability, and improved market sentiment.

The near-term prospects of Pakistan’s economy heavily rely on progress under the economic adjustment program. This program aims to stabilize the economy, rebuild buffers for domestic and external balances, and provide a foundation for a possible successor program under the new government. The program includes fiscal consolidation, monetary tightening, a market-determined exchange rate, and structural reforms in energy, state-owned enterprises, banking, and climate resilience.

While the report projects a modest recovery in FY2024, uncertainty will persist, and stabilization measures will limit the growth of demand. Private consumption and private investment are expected to grow by about 3% and 5% respectively, despite fiscal and monetary tightening and double-digit inflation.

The report suggests that the implementation of the economic adjustment program and a smooth general election could boost confidence. The easing of import controls is also expected to support investment, while an increase in agriculture output, aided by government relief measures, would benefit the industry. However, the downside risks include global price shocks and slower global growth.

The report also outlines the FY2024 budget, which targets a primary surplus of 0.4% of GDP and an overall deficit of 7.5% of GDP, gradually declining over the medium term. Tax revenues are expected to reach 10.3% of GDP, while spending on defense, energy subsidies, and provincial budgets will be limited to protect priority social and development outlays.

Inflation is projected to ease in FY2024 due to base year effects and normalized food supply. The central bank is expected to gradually raise the policy rate to reduce inflation. However, significant inflationary pressures still remain, particularly due to an increase in petroleum, electricity, and gas tariffs.

The report warns that the rupee could weaken further as import and exchange rate controls are eased, raising the cost of imported goods. It also highlights the potential disruptions to wheat, rice, and other basic food supplies due to the El Nino climate pattern and the ongoing Russian invasion of Ukraine, which could lead to high inflation of about 25% in FY2024.

Despite a projected increase in the current account deficit, the report expects international reserves to grow. The new program with the International Monetary Fund (IMF) is seen as improving the prospects for multilateral and bilateral financing, while a more market-determined exchange rate is expected to stabilize the currency market and encourage remittance inflows through official channels.

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