News
Thursday, September 15, 2011
ADB warns inflation to stay high in Pakistan
* ADB’s Asian Development Outlook 2011 says Pakistan’s economy to strengthen slightly in FY2012
By Sajid Chaudhry
ISLAMABAD: Asian Development Bank (ADB) has warned that inflation is expected to stay high in Pakistan, easing back only slightly to an average of 13 percent in fiscal year 2012 because of planned upward adjustments in domestic electricity prices, the restoration of automatic pass-through of fuel price increases to consumers and strong inflation expectations built into the economy.
The Asian Development Outlook 2011 update, “Preparing for Demographic Transition”, released on Wednesday, elaborated the economic prospects of Pakistan and stated that the economy is forecasted to strengthen slightly in FY2012 from FY2011, to 3.7 percent, but less than the target of 4 percent of the GDP, buttressed by agriculture’s expected recovery (albeit depending on weather conditions) and continued expansion of services. Growth in large-scale manufacturing is likely to be muted, given that power supplies are unlikely to improve much.
The update says that Pakistan must average a 7 percent annual growth to absorb the 3 percent increase in its labour force each year, adding that its population is young, with more than 65 percent under the age of 30. It states, however, that recent experience - an average economic growth of less than 3 percent in FY2008 to FY2010 - had been too little to take advantage of these favorable demographics.
Slow growth in agriculture in recent years reflects the general decline of the sector since the rapid growth of the 1980s, when it expanded by more than 5 percent a year on average. Water shortages and low investment in irrigation infrastructure over the years have led to a general decline in agriculture productivity. Agriculture needs structural reforms to bring about higher productivity, transformation, and diversification, but with the sector accounting for 44 percent of total employment, such reforms would reduce labour requirements, and so other sectors would have to create jobs to absorb agriculture’s released workers, the update stated.
Realising the budget for FY2012 - with a lower deficit of 4 percent of the GDP - largely depends on containing subsidies and boosting revenues. The budget is expected to gain from steps to cut power and other subsidies by 57 percent relative to FY2011. While efficiency gains in the power sector have somewhat reduced the need for tariff differential subsidies, ending subsidies depends on the pace of power sector reforms.
Revenue receipts are projected to increase by 23 percent from FY2011, relying primarily on efforts to curtail tax evasion. The FY2012 budget ended sales tax exemptions for 500 items, but reduced the sales tax by 1 percent to 16 percent. Net external financing (excluding grants) for FY2011 is expected to be limited to only Rs 8 billion, as repayments due on short-term loans amount to more than $1 billion. Given forecast external financing and grants of Rs 127 billion, the rest of the targeted deficit (Rs 716 billion) would need to be financed by domestic borrowing.
The budget for FY2012 projects the public sector development program to expand to PRs730 billion, an increase of 58 percent over the FY2011 provisional figure. Achieving this ambitious target, in view of limited external resource availability, will depend on fully mobilising budget resources and pushing through measures to contain current expenditure. The current account is seen weakening in FY2012 because of slower export growth of 8 percent (mainly reflecting less favorable export prices) and import growth of 14 percent (mirroring still-high commodity prices and some economic strengthening).
Courtesy www.dailytimes.com.pk