ADB maintains an inflation forecast of 15%.

Islamabad:

The Asian Development Bank (ADB) kept its inflation forecast for Pakistan at 15%, significantly higher than the official target, while predicting the country’s debt to fall to 70% of GDP this fiscal year.

The Manila-based lender’s key report, the Asian Development Outlook, did not provide a new economic growth number for Pakistan, implying it maintained its previous forecast of 2.8 percent growth for this fiscal year, below the official target of 3 .5%.

This release coincides with another comprehensive report by BMI, Fitch Solutions’ macroeconomic research engine, which offered extensive commentary on Pakistan’s political regime, the fortunes of the current coalition government and economic projections for the next decade.

“We expect Pakistan’s economy to underperform its key regional peers over the next 10 years. Growth will average just 3.5% over the decade to FY2032-33, about half the growth rate in Bangladesh or India,” BMI noted.

ADB said Pakistan’s inflation forecast for fiscal year 2025 remains the same as in its April 2024 report. In April, ADB had said rising energy prices under management would keep inflation high at 15% for the financial year 2024-25. The government has set its inflation target at 12% for this fiscal year, which many believe will be missed again due to unprecedented levels of new taxation and increases in energy and fuel prices.

While the ADB projects Pakistan’s economic growth at just 2.8% and inflation at 15%, it projects India’s economy to grow at 7.2% with an inflation rate of 4.5% for the fiscal year 2024-2025.

ADB also said Pakistan’s public debt is expected to decline by seven percentage points to 70% of GDP in the 2024-2025 fiscal year. “However, interest payments are expected to require a staggering 62% of fiscal revenue, up from 41% in 2022-2023,” the lender noted. However, these figures do not fully represent the true cost of debt servicing. For this financial year, the government has allocated Rs 9.8 trillion for interest payments, which is equivalent to 76% of the FBR’s tax target of nearly Rs 13 trillion.

Even at a debt level of 70%, Pakistan’s debt burden will be significantly higher than the average 47% public debt-to-GDP ratio for developing Asia this year. ADB said that despite gradual improvement, some high-risk countries remain in a difficult position. In contrast to ADB’s 70% debt-to-GDP forecast, Fitch Solutions projected the level at 78% of GDP – five percentage points higher than this fiscal year.

BMI Fitch Solutions highlighted that the depreciation of the Pakistani rupee in 2022 and 2023 raised concerns about the sustainability of Pakistan’s external debt. Although the country managed to renew significant debt payments by mid-2023, it has not addressed the underlying problem.

“We predict that Pakistan’s policymakers and their international partners will manage to avoid an acute debt crisis, but we believe that the country’s debt levels will remain high over the next 10 years,” BMI said. Pakistan is currently under an IMF program that has reduced prospects for healthy growth, potentially increasing unemployment and poverty. These dismal results are also reflected in the BMI report, which states that Pakistan will continue to underperform its regional counterparts in the coming years.

“Between 2023/24 and 2032/33, we expect domestic growth to average just 3.5%, compared to 5.4% in emerging markets,” notes the BMI report. This relatively poor performance will cause Pakistan’s GDP per capita to fall further behind India’s. While Pakistan’s GDP per capita was 78% of India’s GDP in 2019, this figure is expected to decline to 51% by 2032, he added.

BMI also commented on Pakistan’s political system and the legal battles faced by Imran Khan. “Despite several successful legal appeals, opposition leader Imran Khan will remain imprisoned for the foreseeable future. We expect the PML(N)-led government to remain in power for the next 18 months and succeed in implementing IMF-mandated fiscal reforms.”

BMI said Pakistan’s economy remains very fragile in the face of external shocks. Since 40% of Pakistanis work in agriculture, another flood or drought would pose a significant risk to the economy. The fragile political situation could also derail the recovery. The strong electoral performance of independent candidates backed by jailed opposition leader Imran Khan shows significant dissatisfaction with the current political elite. Another round of protests in urban areas could disrupt economic activity, according to BMI.

He said the current political administration, without popular support, faces the daunting challenge of managing an economy recovering from the 2022-23 crisis while dealing with fragile security concerns. “Further protests from Khan’s supporters – many of whom believe their party has been targeted by the Pakistani establishment – ​​are likely,” according to BMI.