ISLAMABAD: Certain tax policies in Pakistan discourage investment in the tradable sector, and certain investment laws discriminate against foreign investors, says the World Bank.
The bank in its latest report, “South Asia Development Update toward faster, cleaner growth,” stated that Pakistan’s economic situation is also fragile.
Pakistan’s economy is estimated to have shrunk by 0.6 percent in the fiscal year 2022-23, reflecting widespread damage from the 2022 floods, elevated inflation, and difficulties with its balance of payments. Positive growth is projected to return in fiscal year 2023-24, but at a rate of only 1.7 percent.
The economy still faces substantial challenges from continued inflation pressures, tight fiscal policy related to debt repayments, and extensive flood damage. Pakistan’s foreign exchange reserves remain low, leaving the country with limited buffers against external shocks.
The US dollar value of goods imports shrank by 26 percent in the year to August 2023 as a result of low demand alongside import and capital controls. Input shortages have affected production, with exports declining five percent in the year to August and industrial production shrinking by 15 percent in the year to June 2023.
Consumer price inflation in Pakistan, stood at 27 percent in the year to August, down from a peak of 38 percent in May. The decline reflected the stabilisation of the exchange rate since the beginning of the year, following 18 months of substantial depreciation, as well as an unwinding of the food price spike caused by the widespread damage from last year’s floods.
The central bank has tightened monetary policy to combat high inflation, increasing its benchmark interest rate by 100 basis points most recently in June, to 22 percent, the report noted.
The bank stated that financial stresses were most severe in Pakistan and Sri Lanka. In Pakistan, the rupee depreciated sharply between early 2022 and early 2023 and has been broadly stable since. Last year’s attempts to limit capital outflows through import and capital controls diverted remittance inflows from formal channels, contributing to shortages of foreign currency.
In both Pakistan and Sri Lanka, foreign reserve coverage is low, asset quality is weak in both the bank and non-bank financial sectors, and buffers against future shocks are thin.
Primary fiscal deficits are expected to narrow over the projection period, particularly in Bangladesh, Pakistan, and Sri Lanka, as these countries consolidate their fiscal positions in line with their IMF-supported policy programmes.
The economy remains dependent on capital inflows to finance substantial fiscal and current account deficits. Import controls intended to narrow the trade deficit have also impeded the supply of industrial raw materials and depressed growth more than expected. These controls have been removed this year as an IMF lending program has stabilised the currency and boosted business confidence.
In Bhutan, Pakistan, and Sri Lanka, the average annual growth rate of investment in the past five years has been negative or near zero, with public investment particularly weak in Pakistan and private investment growth particularly weak in Bhutan.
In Bhutan, Nepal, and Pakistan, reducing subsidies or budgetary support to state-owned enterprises could allow for greater private sector participation while also increasing fiscal space. In Pakistan, state-owned enterprises tend to have low investment rates, while also consuming government resources equivalent to around 23 percent of the fiscal deficit in fiscal year 2023.
Pakistan, could boost productivity, diversify its exports, and increase product sophistication by reforming export subsidy and import duty schemes. Interest payments in Pakistan accounted for more than half of federal current government expenditures in fiscal year 2023.
In 2022, the number of product groups affected by various restrictive import measures in Bangladesh was seven times the EMDE average, and more than 10 times the EMDE average in Pakistan and Sri Lanka.
Pakistan and the Maldives were exceptions, where workers in green jobs did not receive significantly higher wages than other workers with similar characteristics. This, in part, reflected differences in the most common green jobs, in particular a greater prevalence of mid-skilled green jobs in Pakistan and of green jobs in low-wage construction in the Maldives.
In Pakistan, considerably more green jobs were mid-skilled — about 80 percent of them—than in South Asia as a whole, where the proportion was 43 percent, the bank added.
Copyright Business Recorder, 2023