Pakistan: Country Economic Forecast: 18 Apr 2013

GDP growth is still seen at 3.6% in 2012/13, similar to the outturn in 2011/12 but below initial official hopes of over 4%. Growth of some 4-5% is forecast for 2014-15, but this will depend on reduced political uncertainty and a resumption of IMF support needed to encourage renewed FDI and other capital inflows. Inflation slowed to 6.6% in March and may moderate further in the next two months on base effects. But the SBP has held its policy rate at 9.5% since December and, with inflation seen averaging close to 8% this year and the fiscal deficit expected to be over 6% of GDP again in 2012/13 (well above the target of 4.7% of GDP), interest rates may be on hold for some time. There was a big fall in the current account deficit in the first eight months of 2012/13, helped by continued buoyant inflows of workers' remittances, but the deficit is still forecast to climb in 2013-14. And with FDI inflows having halved in 2011/12 and reserves down to under US$12bn in early April, a new IMF deal is needed to bolster confidence. Political tensions look set to persist ahead of parliamentary elections in May. These strains are likely to continue to delay any improvement in economic policy, with the result that IMF support and FDI and other capital inflows will remain elusive. So the risks to our growth forecast remain on the downside.