External risks have increased - and despite recent reforms Pakistan has limited buffers to absorb major shocks, says the World Bank (WB). The WB report "Pakistan Development Update", launched here on Wednesday has projected that Pakistan''s Gross Domestic Product (GDP) growth will accelerate to 4.5 in the current fiscal year and to 4.8 percent in fiscal year 2016-17. Removing infrastructure bottlenecks, especially in energy, will be crucial to accelerate growth and its long-term sustainability. Security situation, though improved, still affects growth prospects negatively.
The report states 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.
Private investment in Pakistan has been declining due to a weak business climate, inconsistent trade and industrial policies and low domestic savings rate, which has implications for the country''s long term growth potential. Worryingly, private investment as a share of GDP has been declining and stood at 9.7 percent of GDP in fiscal year 2014-15. It further states that lack of complementary public investments and a weak investment climate are constraining private sector investment. Constrained fiscal space limits the government''s ability to make the necessary complementary public investments. In addition, inconsistent trade and industrial policies create disincentives for investors and contribute to a weak business environment, as evidenced by Pakistan''s ranking in most international surveys dealing with this issue, like the Global Competitiveness Ranking.
Ongoing energy shortages, limited external demand and structural bottlenecks all constrained industry growth. The weak growth in the industrial sector also acted as a drag on related services sectors such as trade and communications, which also posted relatively slow growth. However the report states that investment is forecast 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. Investments foreseen in the China Pakistan Economic Corridor will also contribute to an increase in investment.
It further states that external and internal balances are projected to improve. The current account will reach around 1 percent 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, and the government has an ambitious target of reducing the deficit to 3.5 percent of GDP by fiscal year 2016-17.
The report adds, "Consistent implementation of the government''s reform agenda will be crucial to maintain macroeconomic stability and accelerate and maintain growth. 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 prevent major shocks to the government''s fiscal stance should also include reducing the fiscal risks of the frequent natural disasters affecting Pakistan. On the external side, it will be important to increase efforts to attract more FDI from the current low levels, by improving the overall business climate and address regulatory weaknesses at the sectoral level that may be affecting the country''s ability to attract investment. Continued implementation of the government''s reform agenda to address structural bottlenecks, in particular in the energy sector, will also be crucial to be able to attract more investment.
Agriculture sector, which is more than one-fifth of the economy, is expected to grow at about 3 percent in fiscal year 2015-16. The industrial sector is expected to grow at 4.4 percent, lower than the official target of 6.4 percent. Services which has been a mainstay for growth in the last few years, is expected to grow at about 5.2 percent in fiscal year 2015-16. High degree of vulnerability to poverty remains a substantial challenge. A very large share of households is clustered around the poverty line and is a shock away from falling back into poverty, maintained the report.
The trade deficit will widen in the near term but continued remittance inflows are expected to finance much of it. Exports are projected to contract by half a percent in the first year owing to tapered global demand and then grow marginally the following year. Imports, however, are projected to post moderate growth due to CPEC-related investments and higher domestic demand.
"There is an improvement in Pakistan''s overall economic environment. With macroeconomic stability largely restored, Pakistan can focus now on boosting development outcomes, which are not where one would expect, given the country''s income level," said Patchamuthu Illangovan, WB Country Director for Pakistan.
"To improve the country''s competitiveness, it is extremely important that the next phase of reforms is implemented and that Pakistan increases both public and private investment levels, which are among the lowest in the world," Illangovan added. "Low domestic savings do not support higher investment levels," said Enrique Blanco, Lead Country Economist. "The government cannot make the required and complementary public investments, partly due to low revenue levels. The government has embarked on ambitious program to improve tax policy and simplify tax administration, with the ultimate aim of increasing tax collection. There have been some improvements over the past few years - but results so far are not as expected and renewed efforts will be needed to address Pakistan''s very low revenue levels," he added.
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