Security situation: World Bank estimates put annual cost at around two percent of GDP

The World Bank estimates put the annual cost of the security situation of Pakistan at around 2 percent of GDP as the security risks related to extremism and sectarian tensions continue to have a negative impact on economic activity in the country.
The Bank report, "Pakistan Country Snapshot", states that for the economy to accelerate in the long run, key growth constraints like electricity shortages, cumbersome business climate, complex trade regime, low access to finance and security situation need to be addressed. For sustained and inclusive growth, Pakistan needs to successfully implement reforms in energy and taxation, and increase investment.
The slowdown in China, if protracted, could have adverse effects on investment and trade, and Pakistan may not have the ability to absorb external shocks in the absence of strong buffers, maintained the report. The report states that realisation of tax revenue targets largely hinges on steady implementation of tax reform agenda. Fiscal consolidation may also be negatively affected by delayed implementation of the government's privatisation agenda.
According to the report a mild recovery is underway, macroeconomic stability has largely been restored and key external risks are lower. The record increase in remittances and stable agricultural performance continues to support a steady growth outlook. Prospects for continued growth appear reasonably bright, supported by strong fiscal consolidation and an improved external position. Downside risks, chiefly the China slowdown, may affect this outlook.
The WB macroeconomic outlook for the next two years projects steady growth recovery-cum-low inflation, supported by fiscal consolidation and an improving external position. Pakistan's economic growth is projected to accelerate to 4.5 percent in fiscal year 2016 and then further to 4.8 percent in fiscal year 2017 supported by strong growth in industry and services. Investment is expected to increase to 15.4 percent of GDP by fiscal year 2017 on account of operationalisation of China Pakistan Economic Corridor (CPEC)-related projects. Inflation is projected to stay low in view of low commodity prices, exchange rate stability and a prudent fiscal policy.
Federal Board of Revenue (FBR) collection continues to fall short of targets. Total public debt is on a declining path, an outcome that coupled with improved import coverage has allowed Pakistan to qualify again for International Bank for Reconstruction and Development financing.
The current account deficit is projected to increase slightly to 1.0 percent of GDP by fiscal year 2017 but will remain manageable. So far, remittances originating from Gulf countries have not been affected by the decline in oil price and are expected to stay robust in the near term. Exports are projected to contract 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.
Despite some progress, a large portion of the population remains vulnerable to falling back into poverty. Although Pakistan's recent gains in poverty were rapid, they remain fragile, in part because many households remain clustered near the poverty line. An estimated 23 million people - 13 percent of the population - live on an amount between $1.25 and $1.50 per day, meaning that small reductions in consumption can greatly increase poverty rates. Poverty measurement remains controversial in Pakistan.
Governance issues continue to hold back the country's efforts to accelerate economic growth, reduce poverty, and increase prosperity for all its citizens. Security continues to be the weakest area of governance in Pakistan. Security risks related to extremism and sectarian tensions continue to have a negative impact on economic activity across the country. In addition to the cost in human lives, hostilities and acts of terrorism disrupt economic activity, cause damage to private property and public infrastructure, and deter investments. At the national level, World Bank estimates put the annual cost of the security situation at around 2 percent of GDP.
The economic impact has been most acute in the poorer and most crisis-prone regions of the Federally Administered Tribal Areas (FATA), KP, and Balochistan, which are affected by the ongoing conflict in neighbouring Afghanistan. In the past couple of years, militant activity has been reduced in some areas, but a return to normal economic activity will require sustained improvements in the security situation.
Despite its tremendous potential to spur economic growth and create jobs, the private sector in Pakistan continues to face a tough investment climate as reflected by consistent deterioration in the country's Doing Business (DB) rankings. In June/July 2013, the government cleared the entire stock of circular debt of roughly $4.8 billion, but it has re-emerged because the underlying issues were not addressed; power sector payables to generators and fuel suppliers as of June 2015 were about $3 billion. This both reduces incentives for investment and creates shortages due to periodic liquidity issues. The government is now making significant efforts to address the underlying causes and aims to maintain a cap on it and reduce it to about $2.1 billion by fiscal year 2018.