ISLAMABAD, Sept 14: Pakistan’s public debt at record Rs11 trillion raises rollover and interest rate risks, while inflation rate is predicted to stay strong despite a slight recovery in national economy expected during the current financial year, according to the Asian Development Bank.

In its Asian Development Outlook 2011 update, the Manila-based multilateral agency reported a 29.2 per cent increase in domestic public debt to Rs6 trillion (33 per cent of GDP) while external public debt rose to $56.3 billion (Rs4.8 trillion) or 26.6 per cent of GDP.

It said the average maturity for domestic debt has fallen to 18 months and with interest rates above 12 per cent costs were equivalent to about 35 per cent of federal tax revenue for fiscal year 2011. “The shortening maturity for domestic debt raises both rollover and interest rate risk.” The economy is forecast to strengthen slightly in fiscal 2012 from 2011, to 3.7 per cent, buttressed by agriculture’s expected recovery – depending on weather conditions – and continued expansion of services. Growth in large-scale manufacturing is likely to be muted, given that power supplies are unlikely to improve much.

The bank said Pakistan must average 7 per cent annual growth to absorb the 3 per cent increase in labour force each year as its population is young, with more than 65 per cent under the age of 30. Recent experience, however, suggests that with average economic growth of less than 3 per cent in the past four years has been too little to take advantage of these favourable demographics.

Still to recover from a year-long pressure from extensive flood damage, energy shortages, security issues and a burgeoning fiscal deficit and high inflation despite strong export and remittances, Pakistan will have to overcome its longstanding macroeconomic and structural imbalances, the ADB warned.

Inflation is expected to stay high, easing back only slightly to an average of 13 per cent in fiscal year 2012 because of the planned upward adjustments in domestic electricity prices, the restoration of automatic pass-through of fuel price increases to consumers, and strong inflation expectations built into the economy.

Realising the budget for 2012 with a lower deficit of 4 per cent of GDP largely depends on containing subsidies and boosting revenues.The budget is expected to gain from steps to cut power and other subsidies by 57 per cent relative to fiscal year 2011. While efficiency gains in the power sector have somewhat reduced the need for tariff differential subsidies, ending subsidies will depend on the pace of power sector reforms.

Power shortage The ADB said the increasingly severe and unpredictable power outages undermined industry which virtually stagnated (down 0.1 per cent) during the last financial year. This outcome was due to a large fall – about one-fifth – in electricity output, in part caused by a sharp drop in nat ural gas production and flood damage. Power supply problems in turn hit production in areas such as cement, metal industries, electronics and textiles as well as exporters’ ability to deliver on schedule.

Bolstered by good wheat and sugarcane harvests, agro-based industries were less affected while growth in large-scale manufacturing came in at 1.1 per cent. Finally, construction eked out a mere 0.8 per cent expansion as public spending shifted from projects to flood relief and reconstruction work started only after a delay.

Although the services growth at 4 per cent accounted for most of the economic growth, the expansion was led by public administration and defence (13.2 per cent) as well as social services at 7.8 per cent – partly supported by external financing for flood relief.

Going forward, the revenue receipts are projected to increase by 23 per cent from last year, relying primarily on efforts to curtail tax evasion.The 2012 budget ended sales tax exemptions for 500 items, but reduced the sales tax by 1 per cent to 16 per cent. Net external financing (excluding grants) for the year is expected to be limited to only Rs8 billion, as repayments due on short-term loans amount to more than $1 billion.

Given forecast external financing and grants of Rs127 billion, the rest of the targeted deficit (Rs716 billion) would need to be financed from domestic borrowing. Since the government has agreed to limit borrowing from the central bank this year, commercial banks and non-bank institutions will need to provide financing of about 3.3 per cent of GDP.

Water shortages and low investment in irrigation infrastructure over the years have led to a general decline in agriculture productivity, which needed structural reforms to bring about higher productivity, transformation and diversification. However, with the sector accounting for 44 per cent of total employment, such reforms would reduce labour requirements, and so other sectors would have to create jobs to absorb agriculture’s released workers.