Real economic growth rate and inflation review under FDI wishes.

• Author: Shaikh, Khurram Adeel
• Position: Foreign direct investment

Byline: Khurram Adeel Shaikh

The Asian Development Bank (ADB), in its latest report, has projected the economic growth rate of Pakistan at 2.8%; which is the lowest in South Asia. Whereas the inflation rate would be 12%; which is highest in the block of eight nations.

Pakistan's Gross Domestic Product (GDP) growth slowed as economic policies to address the twin deficits took effect. In fiscal year 2018-19, the growth slowed to 3.3 percent; i.e. a 2.2 percentage points decline compared to the previous year, due to the stabilization measures undertaken by the government. Over the past year, the exchange rate was allowed to depreciate, with a cumulative depreciation of 25.5 percent, the development budget was cut, and energy prices were increased.

The Current Account Deficit (CAD) declined. The CAD narrowed to US$13.5 billion (4.8 percent of GDP) in FY19 compared to US$19.9 billion (6.3 percent of GDP) in FY18. The decline was primarily driven by lower import growth (goods imports declined by 7.4 percent while services imports fell by 14.9 percent). Exports, on the other hand, did not respond to the exchange rate depreciation, as regaining competitiveness after an extended period of an overvalued exchange rate will take time. The growth in remittances by 9.7 percent year-on-year in FY19, due to higher flows from USA, Malaysia, and GCC countries, also supported the current account. The narrowing of the CAD has continued in FY20, as the CAD declined to US$1.3 billion in Jul-Aug FY20, compared to US$2.9 billion in Jul-Aug FY19. Imports declined by 23.4 percent year-on-year in Jul-Aug FY20, while exports recorded a marginal recovery of 1.4 percent year-on-year.

As per ADB Report, Pakistan's economy in fiscal year 2019, which ended on 30 June, is showing signs of recovery as the government's fiscal consolidation and austerity measures to address the structural weaknesses started to take effect. There are signs of recovery in the current account deficit, foreign exchange reserves and the IMF deal will also improve economic prospects. However, the ADB's report showed deterioration in real economic growth rate and inflation, besides pointing out challenges posed by the high fiscal deficit and growing public debt.

Given the need for the authorities to address sizable fiscal and external imbalances, the economy is expected to slow further, with GDP growth projected at 2.8% in the fiscal year 2019-20. Earlier, the ADB had projected a 3.6% growth rate for...