THURSDAY JANUARY 19: World Bank spells out reasons behind weak growth

ISLAMABAD: The World Bank has said that Pakistan's weak growth during a particular period is the result of the worsening security conditions, accompanied by political uncertainty and a breakdown in policy implementation. The World Bank report titled 'Global Economic Prospects:
Uncertainties and vulnerabilities' says the economic activity in Pakistan, representing about 15 percent of regional (South Asian region) GDP, continues to markedly lag outcomes elsewhere in the region, reflecting worsening security conditions, greater political uncertainty and a breakdown in policy implementation.
The report discloses that the GDP growth slowed to 2.4 percent in fiscal year 2010/11, ending in June 2011, from 4.1 percent in 2009/10, in part due to the economic disruptions of the devastating floods that hit in July and August of 2010. Pakistan is projected to post a rebound to 3.9 percent in 2011/12, and to firm further to 4.2 percent in 2012/2013.
The report reveals that the regional deceleration in growth reflects internal and external headwinds. On the domestic front, more restrictive macroeconomic policy stances, aimed at reducing stubbornly high inflation and unsustainably large fiscal deficits, have contributed to a weaker domestic demand. Higher borrowing costs, elevated inflation, moderating economic activity and some local factors (eg policy uncertainty, stalled reforms, and deteriorating political and security conditions) have contributed to a significant slowdown in investment growth.
An important factor that helped developing countries with their 2009 external financing needs was official lending (including assistance from the IMF), which jumped to $28 billion immediately after the crisis in 2008, and more than doubled in 2009, reaching $70 billion. The World Bank Group tripled its lending to $21 billion. Between September 2008 and February 2010, more than 20 countries entered agreements with the IMF, with four of the stand-by agreements (Romania, Pakistan, Hungary and Ukraine) larger than $10 billion.
Inflation remains more problematic in Pakistan. In South Asia, headline inflation for India and several other countries remains high, for the former within a 5-6 point range (Saar), and for Pakistan between 10-and 11 points.
Industrial production surged to grow at a robust 32.1 percent annualised pace during the three months ending in October (3m/3m, at seasonally adjusted annualized rates), after falling at 9.1 and 10.1 percent rates during the first and second quarters, respectively. Part of the strengthening in growth reflects base effects due to the widespread flooding that had hampered activity in the second half of 2010. Indeed, because the floods occurred in July and August 2010, GDP growth on a fiscal year basis (ending June-2011) slowed to 2.4 percent from 4.1 percent in FY2009/10.
The report highlights that for India, Pakistan, Bhutan and Bangladesh, however, domestic crop conditions and price controls are more important determinants of domestic food price inflation. Administered fuel price increases in Bhutan, India, the Maldives, Nepal and Pakistan have also contributed to price pressures, although pass through of international price increases has been incremental and partial, such that some targeted local food and fuel prices remain subsidised to varying degrees (and below international levels).
According to the report, the monetary authorities in Bangladesh, India, Pakistan, and Sri Lanka have responded to persistent price pressures by raising policy interest rates and/or introducing higher reserve requirements. A slower revenue growth has contributed to larger fiscal deficits in Bhutan, Nepal and Pakistan.
Worker remittances remain a critical source of foreign exchange in South Asia equivalent to 20 percent of GDP, as of 2010, in Nepal, 9.6 percent in Bangladesh, 7 percent in Sri Lanka and 5 percent in Pakistan. If the global conditions were to deteriorate sharply, remittances growth could stall, resulting in weaker incomes, weaker foreign currency earnings and slower domestic demand growth within the region.
Countries heavily reliant on foreign assistance, such as Afghanistan, Nepal and Pakistan, could be hit hard if fiscal consolidation in high income countries were to result in cuts to overseas development assistance. Global Economic Prospects: Given the lack of fiscal space in South Asia, inflationary pressures and consequent limited room for monetary policy easing, fiscal consolidation through greater revenue mobilisation (particularly in Pakistan, Sri Lanka, Bangladesh, and Nepal) and expenditure rationalisation (especially in India) could play a key role in helping to protect critical social programs.