This was stated in the Asian Development Bank's (ADB) Asian Development Outlook (ADO) 2019 Update under Pakistan's prospects. The report further maintains that the government plans to catalyze significant international financial support to restore macroeconomic stability and promote sustainable and balanced growth under a 3-year economic stabilization and reform program with the IMF.
Under the programme fiscal consolidation aims to reduce the large public debt while expanding social spending, establish a flexible exchange rate regime to restore competitiveness, and rebuild official reserves.
Given the need for the authorities to address sizable fiscal and external imbalances, the economy is expected to slow further, with GDP growth projected at 2.8% in fiscal year 2020. Fiscal adjustments are expected to suppress domestic demand, and demand contraction will keep growth in manufacturing subdued.
However, agriculture is expected to recover from weather-induced contraction this year, with major incentives in the government's agriculture support package included in the budget for fiscal year 2020. Inflation remained elevated at the start of fiscal year 2020 at 9.4% in July and August and is projected to accelerate further to average 12% in fiscal year 2020 because of a planned hike in domestic utility prices, taxes introduced in the FY2020 budget, and the lagged impact of currency depreciation.
Pressure from inflationary expectations can be relieved by the government's commitment to refrain from directly financing the budget deficit by borrowing from the central bank as monetary policy continues to tighten. The economic reform program supported by the IMF envisages a multiyear strategy for revenue mobilization to pare public debt to a sustainable level.
The budget assumes tax revenue increased to equal 14.3% of GDP. With non tax revenue projected at 2.3% of GDP in fiscal year 2020, total revenue is expected to increase to 16.6% of GDP.
Expenditure is projected to equal 23.8% of GDP with an increase of 1.8 percentage points in current spending to cover larger interest payments and higher allocations for social spending to avoid hurting the poor as reform progresses.
At the same time, to support the adjustment efforts, the government set the federal government wage increases below the inflation rate whereas development spending is projected to rise to 3.6% of GDP in fiscal year 2020 and support stronger social spending in the budget.
The budget deficit is expected to equal 7.2% of GDP - still large but 1.7 percentage point lower than the fiscal year 2018 outcome. Financing is expected to come mostly from external and non-bank sources after the government announced that it would not borrow from the central bank toward financing the budget deficit in the ongoing fiscal year.
Resource allocation indicates a shift toward external borrowing, with net external financing estimated at Rs 1.8 trillion, or 4.2% of GDP. Financing from non bank sources is projected at PRs 833 billion, or 1.9% of GDP.
The government has recently adopted the Public Financial Management Act in the context of the finance bill to strengthen fiscal discipline. Working with provincial governments, the federal government will prepare a fiscal strategy to align provincial expenditure and the annual deficit with budgetary targets that have heretofore been routinely breached.
Capacity will be strengthened in the Ministry of Finance for monitoring fiscal risks and conducting cash management. On the external front, the trade deficit shrank by nearly half in July, the first month of2020, from $3.4 billion a year earlier to $1.8 billion.
With further narrowing of the trade deficit and a continued positive trend in workers' remittances, the current account deficit is projected to narrow further to 2.8% of GDP in FY2020. Import payments will remain subdued, reflecting weak economic activity and the pass-through of past rupee depreciation against US dollar. The real effective exchange rate is now thought to be near equilibrium, and a lower and more stable rupee is expected to improve export competitiveness.
Foreign capital inflows are expected to increase. Foreign direct investment should revive as investors' confidence is restored with implementation of the IMF stabilization and reform program.
This should also help bring additional finance from multilateral institutions and other international partners. Along with the activation of a Saudi oil facility with potential disbursements of $1 billion in the current fiscal year, these developments are expected to raise foreign exchange reserves to reach more than $10 billion by the end of fiscal year 2020.