Economy

Pakistan's economy recovered modestly from severe floods a year earlier to grow by 3.7% in Fiscal Year 2012 (ended 30 June 2012). Agricultural growth picked up to 3.1%, markedly easing inflation. While the expansion of the service sector slowed slightly, its size meant it continued to account for most of GDP growth. Energy shortages intensified during the second half of the fiscal year, seriously crimping large-scale manufacturing, which expanded by only 1.2%. Unpredictable and severe load shedding is estimated to knock at least 2 percentage points off GDP growth annually. Investment declined for the fifth year in a row, dropping to 12.5% of GDP, compared with 22.5% in FY2007. Inflation slowed but only to 11%. The countrys sustained double-digit inflation reflects the governments heavy borrowing from the State Bank of Pakistan to finance large budgetary spending and excessive deficits. In FY2012 the deficit was estimated at 8.5% of GDP, including government financing of power sector arrears. The current account deficit at $4.5 billion (2% of GDP), falling capital and financial inflows, and higher debt service payments drove official reserves down by $4.7 billion to $11.9 billion at the end of June 2012. Economic Indicators 2011 - Pakistan GDP growth (% change per year) CPI (% change per year) Unemployment rate (%) Fiscal balance (% of GDP) Export growth (% change per year) Import growth (% change per year) Current account balance (% of GDP)

3.0 13.7 5.6 (6.6) 28.9 14.9 0.1

( ) = negative, CPI = consumer price index, GDP = gross domestic product Sources: ADB. 2012. Asian Development Outlook 2012 Update. Manila; ADB. 2012. Asian Development Outlook 2012. Manila; ADB staff estimates; World Bank. 2012. World Development Indicators Online.

Macroeconomic imbalances and structural issues are expected to hold growth to 3.7% in FY2013, in line with the FY2012 outcome, as the energy shortage is expected to continue as a binding constraint throughout the year. Inflation is expected to remain at 10.0%, reflecting likely budget spillovers. Continued strong growth in remittances is expected to rein in the current account deficit to equal 1.3% of GDP. Improving Pakistans economic performance depends on taking difficult steps to address structural problems. Breaking out of recent doldrums crucially depends on the power sector becoming a reliable supplier of electricity so that there is incentive to substantially increase private investment. Most important for the breakout is to fundamentally improve the countrys fiscal position by both eliminating subsidies and the drain on public finances imposed by lossmaking state-owned enterprises, and to broaden the tax base to raise one of the lowest tax participation rates in the region, promote equity, and provide the revenues needed to fund necessary government functions.