Food prices owing to weaker rupee, supply shortages will push Pakistan inflation: ADB

MANILA (Reuters): The Asian Development Bank (ADB) has warned that soaring prices in Pakistan will push South Asia’s inflation higher and projected 1.9 per cent growth rate for Pakistan in FY2024 (2023-24), slightly below the April projection, assuming continued implementation of reforms and supportive macroeconomic policies, recovery from flood-induced supply shocks, and improving external conditions.

Political stability following general elections later this year, if achieved, will boost business confidence, as will a new standby arrangement agreed with the International Monetary Fund (IMF) to support economic stabilization and rebuild fiscal buffers, the ADB said in its Asian Development Outlook September 2023.

It warned that average inflation in Pakistan will soar to 29.2 per cent caused by supply shortages, continued currency depreciation, import restrictions, and fiscal stimulus for post-pandemic recovery.

“Normalized food supplies and lower inflation expectations, albeit tempered by higher power and gas tariffs and likely currency depreciation, could ease inflation somewhat in FY2024, but Pakistan’s inflation rate is now expected to remain at 25.0pc in FY2024, substantially higher than forecast in April.”

The ADB noted that adherence to an economic adjustment programme [signed with the IMF] through April 2024 will be critical for restoring stability and the gradual recovery of growth, adding that price pressures were to remain elevated. “Downside risks to the outlook remain exceptionally high.”

Meanwhile, the ADB said updated assessment economic growth in Developing Asia this year will be slightly lower than previously expected as the weakness in China’s property sector and El Nino-related risks cloud regional prospects.

Updating its regional economic outlook, the ADB trimmed its 2023 growth forecast for Developing Asia to 4.7pc, from 4.8pc projected in July.

But the growth forecast for next year for the grouping, which consists of 46 economies in the Asia-Pacific and excludes Japan, Australia and New Zealand, was revised slightly upwards to 4.8pc from 4.7pc previously.

“We see resilient growth in the region really based on pretty strong domestic consumption and investment, and despite reduced external demand, which is a dampener on export-driven growth,” Albert Park, ADB’s chief economist, told a press conference.

The ADB tempered its growth forecasts for East Asia, South Asia, and Southeast Asia this year, with China and India expected to grow 4.9pc and 6.3pc, respectively, slightly lower than the July growth projections of 5.0pc and 6.4pc.

China’s property crisis “poses a downside risk and could hold back regional growth,” the ADB said in its report.

The Manila-based lender maintained its 2024 growth forecasts for China and India at 4.5pc and 6.7pc respectively.

While growth has so far been robust and inflation pressures are receding in Developing Asia, Park said governments need to be vigilant against the many challenges the region faces, including food security.

Inflation in Developing Asia is forecast to ease to 3.6pc this year from 4.4pc last year, and continue to slow to 3.5pc in 2024, giving central banks a policy space, but the ADB said interest rate hiking and easing cycles will vary going forward.