Pakistan economic outlook positive but challenges remain: ADB

Pakistan's economy will continue to pick up in fiscal year (FY) 2016 as reform and stabilization measures provide a lift, with higher foreign exchange reserves, and softer inflation and oil prices also supporting the overall macroeconomic outlook, the Asian Development Bank (ADB) said in its latest flagship annual economic report.

The Asian Development Outlook 2016 (ADO), released on Thursday, forecast growth of 4.5 percent for FY 2016 and 4.8 percent in FY2017. In FY2015, growth came in at 4.2 percent.

While the outlook is for moderate gains in growth, the report also notes that continued public sector enterprise losses, insufficient energy and power evacuation capacity, and security concerns will continue to test the country's economy.

"Pakistan needs to stay the course of macroeconomic and structural reforms, in particular in revenue collection, the energy sector, and in revitalizing public sector enterprises that have been causing a fiscal drain," said Werner Liepach, ADB's Country Director for Pakistan.

"These reforms are critical for fiscal and economic sustainability and to promote investment and economic growth", he said.

The ADO notes that large scale manufacturing grew by 3.9 percent in the first half of FY2016 from a rise of 2.7 percent in the same period the year earlier, boosted by low raw material prices, expanded construction, and low interest rates.

However, textile production grew by only 1 percent over the same period due to weaker demand in export markets and increased competition, with falling global commodity prices and heavy rains damaging cotton output, Pakistan's vital agriculture sector is expected to experience slower growth in FY2016.

The key challenges impeding stronger economic growth include inadequate infrastructure and transport connectivity, weak governance and institutions, and limited access to finance. That in turn raises the cost of doing business, undermines productivity, and hinders access to public services.

Low investment in human development has also left Pakistan with a workforce lacking the skills needed to help the country compete in global markets and to increase productivity by producing goods with higher value, the report says.

Improved prospects for the economy, therefore, depend on faster implementation of ongoing reforms to alleviate power shortages, expanding fiscal space, fostering a competitive business environment, and liberalizing trade.

The ADO notes that ongoing and planned investments under the flagship economic corridor between Pakistan and China, as well as other regional cooperation initiatives, are spurring development activity and some market optimism. Sustained economic reforms and an improvement in the security environment should further boost business confidence and foster increased private investment. Enditem