ISLAMABAD - The Asian Development Bank (ADB) has noted that power outages are estimated to cut economic growth by 2 percent annually in Pakistan, making it unlikely that the country would able to move toward the 7 percent growth rate needed to generate adequate employment and meaningful poverty reduction.

According to ADB's flagship annual financial publication, Asian Development Outlook, the current environment in the power sector, in which receipts do not cover costs, means that for every unit of power sold there is a large loss that is either covered by a government subsidy or becomes part of the continuously accumulating arrears of the state-owned power companies. Growing arrears, which reached Rs450 billion at the end of December 2012, or about 2 percent of the GDP, constrain the availability of cash needed to operate existing power-generation assets at full capacity.

The report reads: “It will take time to move to a more efficient system for generating, transmitting, and distributing electricity, improvements to collection, adjustments to pricing mechanisms, and improved management could enable higher power generation, lift the financial burden on the budget, and motivate private investment in the sector.

“The economic growth picked up slightly, but for the fifth consecutive year low growth, falling investment, excessive fiscal deficits, high inflation, and a deteriorating external position weighed on the economy. While problematic security and natural disasters are endemic, a difficult political situation stalled effective policy response to macroeconomic and structural problems, especially regarding energy. Official reserves are steadily declining on low capital inflows and heavy debt repayments.

“The economic situation weakened further in the first half of FY2013 as official reserves declined markedly, food and general inflation both reaccelerated in January following their earlier decline, and exports stagnated while imports contracted. ADB estimated that economic growth is expected to slow to 3.6% in FY2013, with risks on the downside from possible shortfalls in agricultural production, which may offset the modest improvement in large-scale manufacturing during the first half of the year. Manufacturing performance for the year will hinge largely on limiting power outages during the hot season, when demand peaks. With little prospect for improving energy supply or investment, growth is expected to remain weak at 3.5% in FY2014.

“Consumer price inflation continued a downward trend during most of the first 8 months of FY2013 as food price inflation decelerated. However, year-on-year inflation at 7.4% in February 2013 was higher than the year low of 6.9% in November 2012 as food prices moved higher Nevertheless, food inflation in this fiscal year is much slower than a year earlier, reflecting improved supply. Core inflation, excluding food and energy, also improved but, at 9.6% in February 2013, remains stubbornly high with many of its subcomponents staying in double digits, reflecting entrenched inflationary pressure in the economy. However, with slower growth in food and energy prices, inflation is expected to average 9.0% in FY2013, or 2 percent lower than in the previous fiscal year.

“Easing inflation early in FY2013 prompted further reductions in the central bank's main policy rate by a total of 250 basis points, bringing it to 9.5% in December 2012. While banks' weighted average rate on new loans in this period fell by about 200 basis points to 11.3%, overarching constraints coming from energy shortages and other uncertainties, such as law and order issues, will limit the impact of interest rate reductions on investment and business conditions in general.

“A modest surplus in the current account during the first 7 months of FY2013, following inflows of $1.8 billion from the Coalition Support Fund, reverted to a deficit of $700 million in February 2013. As disbursements of the same magnitude are not expected during the second half of the year, it is expected that the current account will post a deficit on the order of 0.8% of GDP. Exports contracted by 0.9% during the first 8 months of FY2013, but a 3.5% contraction in imports was four times larger (Figure 3.20.11). Low export growth was largely the result of 2.7% lower textile exports, reflecting the impact of sustained energy shortages, difficulties in meeting production schedules, and slack global demand. The contraction in imports was mostly of food, transportation equipment, and petroleum.

“Despite improvement in the current account, net liquid foreign exchange reserves declined further, dropping from $10.8 billion at the end of June 2012 to $7.9 billion at the end of February, reflecting higher debt amortization payments, including payments to the International Monetary Fund (IMF), and lower financial inflows. Low reserves adequacy, at less than 2 months of imports cover as of February 2013, raises concern over external sector sustainability. Pressure on reserves is expected to continue, with an additional $1.7 billion due to the IMF before the end of FY2013 and $3.2 billion during FY2014. The nominal exchange rate depreciated by 4% in the first 8 months of FY2013.

“The fiscal outlook is largely unchanged from FY2012. Revenue targets announced with the FY2013 budget are unlikely to be met, as tax receipts have grown by only 12.0% in the first 6 months, well below the 23.7% increase needed to meet budget targets.

On the expenditure side, overruns on interest outlays and subsidies are again expected, as subsidy allocations of Rs120 billion have already been exceeded and will reach at least Rs200 billion along with a further buildup of power sector arrears.

The deficit for the first half of FY2013 is 2.5% of GDP, including the 0.7% of GDP from the Coalition Support Fund that is the single payment for the year. Given normal quarterly patterns for fiscal balances, the deficit for FY2013 is expected to breach the 4.7% target and is likely to come in at 7.0%-7.5% of GDP, excluding any payments to settle power sector arrears.

“Government bank borrowing continued in the first half of FY2013. The government did acknowledge requirements under the State Bank of Pakistan Act by retiring PRs399 billion of the Rs505 billion borrowed from the central bank during the first quarter of FY2013, before borrowing back PRs183 billion in the second quarter in response to fiscal pressures, thereby breaching the act once again. Large government borrowing from commercial banks requires ever-larger injections from the central bank on a weekly basis to meet banks' liquidity requirements and keep money market rates anchored within central bank policy rates.”

The report concludes that public debt expanded to Rs1.6 trillion in FY2012, raising the government's ratio of debt to GDP to 62.5%, which substantially exceeded the limit set under the Fiscal Responsibility and Debt Limitation Act. External public debt dropped from 27.6% of GDP to 25.6%, while domestic public debt including the debt of state-owned enterprises increased from 33.3% of GDP to 37.0%. Pakistan's debt is higher than the recommended 30%-40% of GDP for economies at a similar stage of development.