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Despite concerns, Pakistan on growth path: WB

Despite concerns, Pakistan on growth path: WB

ISLAMABAD: The World Bank has projected Pakistan to move on growth path in short term but expressed concerns over low foreign investment and domestic savings, increased external risks, slower than anticipated stabilisation and reform agenda.

Released on Wednesday, World Bank’s ‘Pakistan Development Update’ projects GDP growth to accelerate to 4.5 per cent in 2015-16 and 4.8pc in 2016-17, supported by ‘strong services growth and a slight improvement in the industry sector’.

The report assumes that some of the constraints affecting the industry, like power outages, will be addressed in the forecast period.

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It forecasts that investment is set to increase, given both greater fiscal space as well as an increase in private sector investment as the government’s reform agenda begins to bear fruit. However, it noted that private sector credit was lower last year than a year before.

It said the investment scene would be supported by the China-Pakistan Economic Corridor (CPEC).

“External risks have increased and despite recent reforms, Pakistan has limited buffers to absorb major shocks,” the World Bank said.

Structural bottlenecks as well as weak external demand constrained business activity and credit demand by the private sector.

A relatively high real cost of borrowing as inflation declined at a much faster pace than lending rates also played a role in subdued private sector credit demand.

The fast increase in borrowing by the government also tightened financing conditions.

External and internal balances are projected to improve. The current account will reach around 1pc of GDP during the forecast period as it will be supported by robust remittances and a continuation of external financial flows.

Fiscal consolidation is projected to continue while the government has an ambitious target of reducing the deficit to 3.5pc of GDP by 2016-17.

Debt levels are projected to remain in a slowly declining trend while reserves have already achieved more comfortable levels.

But downside risks remain as a more volatile external environment going forward may result in lower financial inflows.

The slowdown of the Chinese economy and slow recovery in the eurozone will weaken external demand, affecting both trade and investment.

Low energy prices benefit Pakistan in the form of lower energy subsidies and fuel imports — but it may eventually affect remittances which have been crucial in financing Pakistan’s persistent trade deficit and supporting consumption, the report notes.

Fiscal consolidation will require strong tax revenue efforts by the government as well as gradual phasing-out of energy-related subsidies and of reduced support to loss-making SOEs.

Efforts to tighten fiscal policy will also need closer coordination with the provinces, and ensuring that progress in the country’s decentralisation effort better aligns the province’s responsibilities with the increased resource envelop that resulted from the 7th NFC award.

Efforts to prevent major shocks to the government’s fiscal stance should also include reducing the fiscal risks of the frequent natural disasters affecting Pakistan.

The bank is worried that the share of investment in GDP remains relatively small, at 15.1 percent of GDP, about half of the South Asian average at 30 percent.

More worryingly, private investment as a share of GDP has been declining and stood at 9.7 percent of GDP in fiscal 2014-15.

“This low investment has implications for Pakistan’s long term growth potential that has been on a clear declining long run trend,” the report adds.

“Lack of complementary public investments and a weak investment climate are constraining private sector investment,” it noted, adding that constrained fiscal space was limiting the government’s ability to make the necessary complementary public investments.

On the positive side, transport, finance and insurance and government services all posted strong growth.

Government efforts for fiscal consolidation continue, but progress is slower than anticipated. The reduction in the deficit was achieved through curtailing the federal development budget and above target non-tax revenues while tax revenues continued to fall short of targets.

Energy subsidies remain large, although lower oil prices have contributed to limiting the energy subsidy bill.

Total public debt stood at 64.6 percent of GDP at the end of 2014-15, a slight decline from the previous year.

Published in Dawn, November 12th, 2015

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