ISLAMABAD - The Asian Development Bank (ADB) has projected Pakistan’s economic growth at 5.2 percent for the current fiscal year due to better security, macroeconomic stability and investment under the China-Pakistan Economic Corridor (CPEC) projects.

“The GDP growth is expected to edge up to 5.2% in FY2017 and 5.5% in FY2018, underpinned by higher growth in the major industrial economies,” the ADB’s new Asian Development Outlook (ADO) 2017 stated. Higher growth in FY2018 reflects accelerated infrastructure investment through CPEC, which is steadily lifting consumer and investor confidence and thereby further catalysing economic activity.

The Bank said that with national elections scheduled for 2018, the budget to be announced in June 2017 will likely prioritise measures to foster economic expansion. The forecast for growth in FY2017 envisages revived agriculture as recovery in cotton and sugarcane off set a forecast decline in the rice crop. The revival is underpinned by special credit facilities, subsidised fertiliser, and improved global commodity prices. Favourable weather, including timely rains in January 2017, augurs a strong winter wheat crop. Prevailing low interest rates, improved electricity supply, and government budgetary incentives announced in June 2016 should boost large-scale manufacturing.

The ADB forecasted Pakistan’s inflation to accelerate to 4.0% in FY2017 on a rebound in oil prices, higher domestic demand, and expanded government borrowing from the central bank. A continued recovery in oil prices will likely accelerate inflation, which is projected to reach 4.8% in FY2018. The central bank will need to be vigilant and readjust its accommodative monetary policy if inflationary pressures intensify.

The report has noted that the government of Pakistan would have to take additional revenue generation measures to achieve budget deficit target of 3.8 percent of the GDP during FY2017. Higher imports and the pass-through of higher oil prices to consumers may be sufficient to boost indirect tax revenue. A shortfall in nontax revenue poses an additional challenge, but it should be mitigated somewhat by expected inflows under the Coalition Support Fund and, if accomplished, the budgeted sale of the 3G spectrum.

“The current account deficit is projected to widen to equal 2.1% of GDP in FY2017. The deficit increased to $4.7 billion in the first 7 months of FY2017, almost double the $2.5 billion deficit in the same period of FY2016. Services and income account deficits worsened as receipts under the Coalition Support Fund were delayed. Meanwhile, the workers’ remittances that critically offset the large trade deficit fell for the first time in 10 years, by 1.9% to $10.9 billion, because of declining expenditures and income in oil-dependent Gulf economies,” the ADB observed. The current account balance will likely deteriorate further in FY2018 to 2.5% of GDP with somewhat higher global oil prices and accelerating infrastructure investments connected with CPEC. A significant increase in the current account deficit could pose a risk to official exchange reserves, which peaked at $18.9 billion in October 2016 and then slid by $1.3 billion by February 2017. The increased inflows in the financial account from multilateral and bilateral disbursements, along with non-debt inflows in the first 7 months of FY2017 are providing a cushion for the widening current account deficit.

The trade deficit widened in the first 7 months of FY2017 by 21.1% to $13 billion as imports accelerated by 9.2%, driven by an 18% increase in investment goods and a 12% rise in oil import payments as prices recovered. Investment goods accounted for 40% of the increase in imports, and oil nearly 30%. Exports continued to decline, but by only 1.3%, which was much smaller than the 11.7% plunge in the same period of FY2016. A third consecutive year of falling exports reflects weak global demand and low international commodity prices but also domestic structural issues such as power outages, scant investment in modernisation, and currency appreciation in real effective terms, all of which hamper competitiveness. The nominal exchange rate was stable at Rs104.7 to the US dollar in the first 7 months of FY2017, but the rupee continued to appreciate in real effective terms, undermining export competitiveness.

Announced in April 2015 as a $46 billion project, but subsequently increased to $55 billion, the CPEC provides for major investments in energy and transport infrastructure. CPEC will be financed largely by China and is expected to be completed by 2030. The project will significantly address Pakistan’s infrastructure deficit caused by annual spending on infrastructure at only 2%–3% of GDP in the past 4 decades. “For Pakistan, CPEC is expected to be a major opportunity to boost growth and development. CPEC is expected to provide many benefits, especially eliminating the power shortages that have held down economic growth in recent years. It will improve connectivity to domestic and international markets and so benefit Pakistan’s lagging regions. The large investment in infrastructure should boost construction and related industries, spurring job creation and growth,” the latest ADO noted.

CPEC investments are likely to require significant increases in imports of equipment and services to implement the projects. In the medium-to-long term, these inflows will likely be followed by financial outflows as loans are repaid and profits repatriated to foreign investors. Higher foreign exchange earnings and exports will be needed to avoid pressure on the external account. To reap the potential benefits of CPEC and shift the economy of Pakistan to a higher growth trajectory, the government must continue to address key constraints on growth. Domestic security has improved significantly in recent years, but consolidating these gains will take continued efforts. Regulation remains burdensome, requiring more reform to provide an enabling environment that facilitates business and fosters investment. Reform to boost exports by diversifying products and markets and by adopting more flexible exchange rate policies are needed to maintain external stability. Similarly, structural reform to the energy sector and state-owned enterprises are required to fully realise investments’ productive potential.