According to the Asian Development Outlook Update report, despite the floods, Pakistan’s economy could still grow by 3.5% and inflation could reach 18% – two key projections for which the government had given a bleak forecast.
The projected economic growth rate of 3.5% is the second lowest in South Asia, and the inflation rate of 18% is the second highest in the region, though the actual growth rate and inflation rate may be lower than the ADB forecast.
The economic outlook, according to the report, will also be dependent on the continued availability of adequate external financing in the face of challenging domestic and global economic and political conditions.
According to the Manila-based lending agency, the potential economic consequences of the recent floods exacerbate the already significant risks to the outlook, which include an elevated inflation rate, possible fiscal slippage as general elections approach, and a higher-than-expected increase in global food and energy prices.
According to the report, the currencies of Lao PDR, Pakistan, and Sri Lanka all fell sharply as debt-related financial stress worsened.
After Sri Lanka and Lao PDR, the rupee was Asia’s third worst performing currency. Since January, the local currency has lost 32% of its value.
However, the ADB recommended that Pakistan maintain exchange rate flexibility in order to absorb external shocks and support the rebuilding of foreign exchange reserves.
According to the international lender, inflation in South Asia is expected to rise to 8.1% in 2022 and 7.4% in 2023, up from 5.5% in 2023.
In comparison, Pakistan’s inflation rate is expected to rise to 18% due to a sharp rise in inflation during the April-June period when fuel and electricity subsidies were removed, the rupee fell against the US dollar, and international commodity prices rose.
With the new tax measures announced in the budget, as well as an increase in the wheat support price and planned upward adjustments to electricity tariffs, inflation is expected to accelerate in the current fiscal year.
Due to supply chain disruptions, the government anticipates that inflation will exceed 27% this fiscal year.
ADB has also reduced its growth forecast for Pakistan to 3.5% from 4.5% in April this year, citing ongoing stabilisation efforts as a constraint on economic activity.
However, the government has forecast 1.2% to 1.7% economic growth in the aftermath of the floods.
Fiscal consolidation, in addition to flood relief, and monetary tightening are expected to dampen domestic demand, according to the lender.
Demand contraction, combined with capacity and input constraints caused by higher import prices as a result of the rupee’s significant depreciation, will reduce industry output.
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