Pakistan’s outlook was uncertain, with high risks on the downside, the Asian Development Bank has said, citing political uncertainty as a key risk to the sustainability of stabilization and reform efforts.

“On the external front, potential supply chain disruptions from escalation of the conflict in the Middle East would weigh on the economy,” the Manila-based lending agency said in its report.

In its April 2024 ‘Asian Development Outlook’, the agency said that disbursement from multilateral and bilateral partners remains “crucial” given the South Asian country’s large external financing requirements and weak external buffers.

“However, these inflows could be hampered by lapses in policy implementation,” it said and added that the IMF support for a medium term reform agenda would improve market sentiment and catalyse affordable external financing from other sources.

Cash-strapped Pakistan would seek a new International Monetary Fund programme after the standby $3 billion arrangement with the global lender expires on April 11.

The Fund has recommended excise duties on luxury goods as the two sides reached a staff-level agreement regarding the disbursal of the final tranche of $1.1 billion last month.

ADB links economic recovery to reforms

Pakistan’s economic growth is projected to remain subdued in the Fiscal Year 2024 and pick up in FY2025, provided economic reforms take effect, the ADB stated.

“Real GDP is projected to grow by 1.9% in FY2024 (Figure 2.20.8), driven by a rebound in private sector investment linked to progress on reform measures and transition to a new and more stable government,” it said.

The ADB said that growth is projected to reach 2.8% In FY2025, driven by higher confidence, reduced macroeconomic imbalances, adequate progress on structural reforms, greater political stability, and improved external conditions.

Output would rise from a low base on improved weather conditions and a government package of subsidised credit and farm inputs that would support expanded area under cultivation and improved yields, it added.

The agency said that further increases in energy prices envisaged under the IMF SBA are projected to keep inflation high.

“Headline inflation is expected to decrease to 15.0% in FY2025 as progress on macroeconomic stabilization restores confidence,” it said.

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The ADB noted that the relaxation of import restrictions, coupled with economic recovery, was expected to widen the current account deficit. “The current account deficit fell to $1.1 billion in the first 7 months of FY2024 from $3.8 billion in the same period in FY2023, as the merchandise trade deficit narrowed by 30.8%.”

A transition towards a market-determined exchange rate was expected to encourage remittance inflows through official channels, thus enhancing the economy’s resilience under future external shocks, it said. But the bank highlighted that Pakistan “will continue to face challenges from substantial new external financing requirements and the rollover of old debt, exacerbated by tight global financial conditions.”

The bank further described closing a financial inclusion gender gap as a “policy challenge” for the country.

The report highlighted that

• Pakistan has one of the lowest financial inclusion rates for women in the world.

• Women face multiple barriers when accessing finance

• On the supply side, expanding women’s financial inclusion requires strong will and a prioritized push for legal and regulatory change.

• Regulators should continue to play a critical role in providing an enabling regulatory environment

• Gender-inclusive opportunities for smaller enterprises and microfinance should be expanded further