ISLAMABAD - The Asian Development Bank (ADB) has noted that Pakistan’s economic growth is expected to slow and inflation would rise driven by higher fuel prices during current fiscal year 2022.
“Growth is expected to slow in fiscal 2022 on tighter fiscal and monetary policy, but strengthen in fiscal 2023 as consumption and investment accelerate,” the ADB noted in its ‘Asian Development Outlook (ADO) 2022’. The GDP growth is projected to moderate to 4 per cent in FY2022 and to 4.5 per cent in FY2023. Slower growth in the current fiscal year reflects the government reactivating its stabilization programme under the International Monetary Fund Extended Fund Facility to narrow the current account deficit, raise international reserves, and cut inflation.
Domestic demand is expected to slow from monetary tightening, restrictions on automobile financing, and additional fiscal consolidation measures enacted in January 2022. The forecast for accelerated growth in FY2023 reflects stronger private consumption and investment, as key structural reforms and greater macroeconomic stability boost household and business confidence.
Inflation will rise in the current fiscal year, driven by higher fuel prices, before receding in fiscal 2023, with the current account deficit widening in fiscal 2022 and narrowing in fiscal 2023. Inflation is expected to pick up in FY2022, averaging 11 per cent. Headline inflation accelerated to 10.5% in the first 8 months, reflecting higher international energy prices, significant currency depreciation, and elevated global food prices from supply disruptions.
The government plans to continue its medium-term fiscal consolidation, rationalizing less essential current spending and expanding tax and nontax revenue. These reforms are projected to trim the fiscal deficit to 5.7 per cent of GDP in FY2022 and 5.5 per cent in FY2023, return the public debt to more sustainable levels, and reduce the crowding out of private sector borrowing. Sustained recovery boosted Federal Board of Revenue (FBR) tax collection by 30.4% in the first 7 months of FY2022, equal to 6.2 per cent of GDP, surpassing the 5.7 per cent target for the period. For the first half of FY2022, total fiscal revenue rose from 6 per cent to 6.2 per cent of GDP, reflecting a higher contribution from sales and income tax that offset a shortfall in the petroleum levy.
The renewed buoyancy of fiscal revenue is expected to strengthen further on the tax measures enacted in January 2022, planned further increases in petroleum levy rates, and additional policy and administrative measures to broaden the tax base. These measures include launching a track-and-trace system, the continued rollout of the point-of-sale system in the retail sector and its integration with the FBR, introducing a single sales tax portal for the FBR and provincial revenue authorities, and reviewing property valuations to bring them closer to market rates. Total government expenditure rose to 8.3 per cent of GDP in the first half of FY2022, due to higher subsidies, from 8.1 per cent in the same period of FY2021, bringing the first half fiscal deficit to 2.1 per cent of GDP.
The current account deficit is projected to widen to 3.5 per cent of GDP in the current fiscal year as strengthening domestic demand and rising international energy and commodity prices propel import costs, outpacing export growth. The current account deficit is projected to narrow to 3.0% of GDP in FY2023 as stabilizing commodity prices and continued fiscal consolidation slow import growth.
The major risks to the economic outlook emerge from higher-than-expected inflation due to a prolonged conflict following the Russian invasion of Ukraine. If global food and energy prices remain elevated longer than anticipated due to supply disruptions, heightened inflationary pressures could undermine growth prospects in the current and next fiscal year. High prices of imported food and energy products will widen the trade deficit, worsening external imbalances and exerting pressure on the local currency. A larger than projected current account deficit and a weaker Pakistan rupee will undermine fiscal consolidation. The International Monetary Fund Extended Fund Facility is scheduled for conclusion in September 2022; the possible end to reform efforts may affect the fiscal and debt outlook in the medium term.
“Pakistan’s economy is recovering steadily thanks to well-coordinated fiscal and monetary responses to the pandemic,” said ADB Country Director for Pakistan Yong Ye. “These led to a remarkable expansion in the industry and services sectors. It is key to continue structural reforms along with appropriate fiscal and monetary policies to contain rising inflation and external imbalances. Comprehensive reforms in tax policy and administration are also critical to boosting revenues in order to fund essential public services. ADB is fully committed to supporting Pakistan’s sustainable development.”
“Growth is expected to slow in fiscal 2022 on tighter fiscal and monetary policy, but strengthen in fiscal 2023 as consumption and investment accelerate,” the ADB noted in its ‘Asian Development Outlook (ADO) 2022’. The GDP growth is projected to moderate to 4 per cent in FY2022 and to 4.5 per cent in FY2023. Slower growth in the current fiscal year reflects the government reactivating its stabilization programme under the International Monetary Fund Extended Fund Facility to narrow the current account deficit, raise international reserves, and cut inflation.
Domestic demand is expected to slow from monetary tightening, restrictions on automobile financing, and additional fiscal consolidation measures enacted in January 2022. The forecast for accelerated growth in FY2023 reflects stronger private consumption and investment, as key structural reforms and greater macroeconomic stability boost household and business confidence.
Inflation will rise in the current fiscal year, driven by higher fuel prices, before receding in fiscal 2023, with the current account deficit widening in fiscal 2022 and narrowing in fiscal 2023. Inflation is expected to pick up in FY2022, averaging 11 per cent. Headline inflation accelerated to 10.5% in the first 8 months, reflecting higher international energy prices, significant currency depreciation, and elevated global food prices from supply disruptions.
The government plans to continue its medium-term fiscal consolidation, rationalizing less essential current spending and expanding tax and nontax revenue. These reforms are projected to trim the fiscal deficit to 5.7 per cent of GDP in FY2022 and 5.5 per cent in FY2023, return the public debt to more sustainable levels, and reduce the crowding out of private sector borrowing. Sustained recovery boosted Federal Board of Revenue (FBR) tax collection by 30.4% in the first 7 months of FY2022, equal to 6.2 per cent of GDP, surpassing the 5.7 per cent target for the period. For the first half of FY2022, total fiscal revenue rose from 6 per cent to 6.2 per cent of GDP, reflecting a higher contribution from sales and income tax that offset a shortfall in the petroleum levy.
The renewed buoyancy of fiscal revenue is expected to strengthen further on the tax measures enacted in January 2022, planned further increases in petroleum levy rates, and additional policy and administrative measures to broaden the tax base. These measures include launching a track-and-trace system, the continued rollout of the point-of-sale system in the retail sector and its integration with the FBR, introducing a single sales tax portal for the FBR and provincial revenue authorities, and reviewing property valuations to bring them closer to market rates. Total government expenditure rose to 8.3 per cent of GDP in the first half of FY2022, due to higher subsidies, from 8.1 per cent in the same period of FY2021, bringing the first half fiscal deficit to 2.1 per cent of GDP.
The current account deficit is projected to widen to 3.5 per cent of GDP in the current fiscal year as strengthening domestic demand and rising international energy and commodity prices propel import costs, outpacing export growth. The current account deficit is projected to narrow to 3.0% of GDP in FY2023 as stabilizing commodity prices and continued fiscal consolidation slow import growth.
The major risks to the economic outlook emerge from higher-than-expected inflation due to a prolonged conflict following the Russian invasion of Ukraine. If global food and energy prices remain elevated longer than anticipated due to supply disruptions, heightened inflationary pressures could undermine growth prospects in the current and next fiscal year. High prices of imported food and energy products will widen the trade deficit, worsening external imbalances and exerting pressure on the local currency. A larger than projected current account deficit and a weaker Pakistan rupee will undermine fiscal consolidation. The International Monetary Fund Extended Fund Facility is scheduled for conclusion in September 2022; the possible end to reform efforts may affect the fiscal and debt outlook in the medium term.
“Pakistan’s economy is recovering steadily thanks to well-coordinated fiscal and monetary responses to the pandemic,” said ADB Country Director for Pakistan Yong Ye. “These led to a remarkable expansion in the industry and services sectors. It is key to continue structural reforms along with appropriate fiscal and monetary policies to contain rising inflation and external imbalances. Comprehensive reforms in tax policy and administration are also critical to boosting revenues in order to fund essential public services. ADB is fully committed to supporting Pakistan’s sustainable development.”