World Bank has revised Gross Domestic Product (GDP) growth for Pakistan upward to 5.2 percent for fiscal year 2017 and 5.5 percent for 2018 against the previous 5 percent and 5.4 percent respectively. The WB report "Global Economic Prospects; weak investment in uncertain times", released on Tuesday, states that the uptake in activity was spurred by a combination of low commodity prices, rising infrastructure spending, and reforms that lifted domestic demand and improved the business climate.
The WB report "Pakistan Development Update", released in November 2016 had projected that Pakistan's GDP growth would accelerate to 5 percent in fiscal year 2017 and 5.4 percent in fiscal year 2018. In Pakistan, growth is forecast to accelerate from 5.5 percent in fiscal year 2018 to 5.8 percent a year in fiscal year 2019-20, reflecting improvements in agriculture, infrastructure, energy, and external demand.
The report further mention the successful conclusion of Special Drawing Rights (SDR) 4.393 billion IMF Extended Fund Facility (EFF) program, aimed at supporting reforms and reducing fiscal and external sector vulnerabilities, lifted consumer and investor confidence. On October 5th, 2016, Pakistan tapped the international market and issued a $1 billion five year dollar-denominated Sukuk (Islamic) bond. The interest rate paid on the bond was lower compared to what the country paid two years ago for raising a similar amount using the same instrument. These positive factors more than offset weak industrial activity, the adverse impact of unfavourable weather on agriculture output, and terrorist attacks in urban areas.
Pakistan implemented various reforms under the IMF's EFF program and World Bank's Development Policy Credits; tackling key structural challenges, such as, reforms to ease energy constraints, tax policy and administrative reforms to raise revenues, and strengthening independence of the State Bank of Pakistan to reduce vulnerabilities. Fiscal policy is also likely to become more accommodative as a result of additional fiscal spending due to approaching general elections in 2018 in Pakistan.
The report states that construction of the new Khanki barrage in the province of Punjab is set to be completed in early 2017. This is expected to provide irrigation to one million hectares of fertile farmland, boosting agriculture. Ongoing progress on the gas pipeline and electricity imports from the Islamic Republic of Iran will ease energy constraints. The China Pakistan Economic Corridor (CPEC) project will increase investment in the medium-term, and alleviate transportation bottlenecks and electricity shortages.
High levels of non-performing bank loans (Bangladesh, India, Pakistan) make banks vulnerable to financial stress and weigh on new lending. In Pakistan, sovereign guarantees associated with the CPEC project elevate fiscal risks over the medium-term.
The report states that terrorist and militant attacks (Afghanistan, Bangladesh, Pakistan), political unrest (Bangladesh, Maldives, Nepal), and border disputes (India-Pakistan) presents risks to the region. If these intensify, risk premiums and financing costs could rise sharply. Furthermore, increased spending on security could exacerbate fiscal vulnerabilities.
In Pakistan, investment surged in 2015, mainly reflecting the CPEC infrastructure project (worth $45 billion). This has more than compensated for sluggishness in private investment. The project is part of China's "One Belt, One Road" initiative, and consists of a network of highways, railways, and pipelines to connect Western China to the Arabian Sea through the Gwadar Port in Pakistan. The Islamic Republic of Iran expressed interest in early 2016 to join the CPEC project. Combined with the ongoing gas pipeline project from the Islamic Republic of Iran, Pakistan should be able to maintain robust public investment growth in the near-term, while private investment is expected to pickup in the medium-term.
Policy and political uncertainty represents a deterrent to investment in parts of the region. Security challenges (Afghanistan, Pakistan) and geopolitical tensions (India, Pakistan) remain a formidable obstacle to creating a more conducive investment climate (Dash, Nafaraj, and Sahoo 2014) especially for cross border projects that could increase regional economic integration. Stalled reforms on land (acquisition, compensation, and environmental clearances) remain a drawback on infrastructure-related private investment.