ISLAMABAD: The government said on Monday that Pakistan’s economic growth would be affected during the current and next fiscal years due to an almost 20 per cent cut in development budget for fuel subsidies and inflationary impacts of global supply chain disruptions amid the war in the Middle East.

“This (cut in development budget) will have a negative impact and, coupled with international oil prices and inflation, will result in economic slowdown and affect our growth target of 4.2pc” for the current year, Planning Minister Ahsan Iqbal said while addressing a news conference.

This is the first official confirmation of lower than targeted economic growth, although international lenders have projected the growth rate between 3.2pc and 3.5pc.

Responding to the question, Iqbal said that the Public Sector Development Programme (PSDP) for the current year had been slashed by Rs173bn to Rs837bn from the Rs1.01 trillion target set in the budget.

He said PSDP was reduced to finance the Prime Minister’s Austerity Fund, created to subsidise fuel prices, particularly that of diesel, in the middle of the harvesting season.

In a response to another question, the planning minister expressed cautious optimism about the success of the second round of US-Iran talks being facilitated by Pakistan, saying that “Such complex and deep-rooted disputes are difficult to end overnight.

“Both parties will have to show flexibility to end global tension and threat to the global economy,” he said. Iqbal hoped that talks would give way to lasting peace to evade the global inflationary storm and looming global economic stagflation.

“The negative impact on growth outlook will be lower this year as the Middle East crisis emerged when three quarters of the current fiscal year have already passed, but will be greater in the first six months of next fiscal year even if war comes to an end immediately,” he warned.

He said the global supply chains and markets normally took six to nine months to get back to normal.

Iqbal said that the entire government would make efforts for “catching up” the economic losses through “budget proposals for exports, exports and exports” because that was the only way to bridge the gap between foreign exchange outflows and inflows.

The planning minister said that Pakistan’s gross domestic product (GDP) growth rate had improved to 3.8pc in the first two quarters (July-December) of the current fiscal year, compared to 1.9pc of the corresponding period last year, before the “external shock” in the shape of the Middle East crisis hit Pakistan and all other economies.

“Oil prices and their smooth supply chain work like oxygen for the global economies, and their higher prices impacted export costs for all,” he said.

“Unlike many other countries, Pakistan’s proactive decision-making did not allow disruption in oil supplies. However, it was necessary to control consumption through price adjustments instead of allowing domestic and external deficits to get out of control,” the planning minister said.

He said it was under this strategy that the government initially increased diesel and petrol rates by Rs55 per litre and then kept them frozen for the following two weeks with a Rs129bn subsidy through a Rs100bn cut in development.

“As the shutdown of Strait of Hormuz continued, the government had to increase petrol and diesel rates by Rs137 and Rs184 per litre, respectively but the prime minister reduced diesel price by Rs135 per litre to minimise cost-push inflation and shield the farmers from additional burden in the midst of crop harvest,” he added.

“Simultaneously, Pakistan’s leadership stepped up in global diplomacy to contain the war between the US and Iran as its continuation was disastrous not only for Pakistan but all economies through the spiralling impact of oil prices and other commodities,” he remarked.

He said that such a scenario would also impact petrochemicals and fertilisers.

“It was in such a situation that even the International Monetary Fund (IMF) lowered global economic forecast to 3.1pc from 3.3pc and upped the inflation estimates to 4.4pc instead of 3.8pc.”

The planning minister said Pakistan’s average inflation had risen to 5.7pc in the first nine months compared to 3.5pc of the same period last year. He said that in March, consumer price inflation jumped to 7.3pc compared to 0.7pc last year, mainly because of non-food and energy prices going up.

He said the government had convened meetings of the National Price Monitoring Committee (NPMC) on a weekly basis from a monthly basis and, in consultation with the provincial governments, ensured price controls and reductions in transport fares in line with the prime minister’s decision for diesel price reduction.