ISLAMABAD – The World Bank on Thursday noted that although Pakistan was not growing as quickly as its neighbors, but it had continued its steady growth, which was expected to rise to 4.8 percent in next financial year (2016-17).
The WB, in its twice-a-year Pakistan Development Update, observed that growth outlook for ongoing financial year (FY16) remains modest with growth expected to increase slightly to 4.5 percent of GDP, which is well below than the government’s target of 5.5 percent. The report highlights that the pace of Pakistan’s economic growth will accelerate modestly through to 2019.
Growth acceleration will be gradual, driven by strengthening investment flows and productivity gains in services, large-scale manufacturing and construction. The growth of 4.5 percent will be driven by large-scale manufacturing growth of 4.0-4.5 percent and services growth of over 5 percent.
The agriculture sector, after suffering a poor cotton harvest, is expected to have slowed to between 2.
0 and 2.5 percent for FY16, compared with 2.9 percent in FY15. “The near-term outlook will be supported by three major near-to-medium tailwinds-rising investments under the China Pakistan Economic Corridor (CPEC), persistently low international oil prices and the anticipated return of Iran to the international community,” the report said.
The World Bank applauded the government for restoring economic stability but noted that much of the country’s economic growth was underpinned by external influences such as low oil prices and strong remittances while private and public investments continue to remain low.
The report is optimistic about recent progress in fiscal consolidation, highlighting a 20 percent growth in the revenues of Federal Board of Revenue for the first eight months of FY16. “Fiscal consolidation is one of the most significant reform challenges facing Pakistan today”, said Enrique Blanco Armas, World Bank Lead Economist for Pakistan. ” The federal government has kept a tight rein on recurrent expenditure, while continuing to invest in Public Sector Development Program expenditure, a very positive development. Outlays for subsidies also continued to decline, declining since H1FY13 from 0.
7 percent of GDP to 0.27 percent of GDP in H1FY16.
While cheap oil imports kept inflation low in H1FY16, the broad-based decline in y-o-y inflation seen in FY15 seems to have bottomed out. Headline inflation is still significantly lower than those witnessed in the same period last year, likely allowing a continued low policy rate.
A 50 basis point cut in the monetary policy rate in H1FY16 brought it to a decade’s low of 6.0 percent.
However, the uptick in headline inflation since October 2015 has arrested the slide in the policy rate.
Workers’ remittances and lower oil prices contributed most to the accumulation in foreign reserves, according to the report. Remittances of $9.7 billion in the first half of FY16 more than compensated for the trade deficit, and oil prices delivered a 9.1 percent fall in the import bill.
The strong balance of payments headline figures, however, mask the structural weaknesses in Pakistan’s export competitiveness. Exports fell by 11.1 percent in the first half of FY16 as a result of softer global demand and domestic bottlenecks.
Port charges in Karachi, for example, are nine times higher than those in Dubai and Singapore.
Shipping container dwelling times are three times longer than in East Asia. Exporters who want to participate in global supply chains are hamstrung by these constraints.
“Pakistan has made great progress in restoring macroeconomic stability but much more needs to be done to put Pakistan on a solid, economic growth footing,” said Illango Patchamuthu, World Bank Country Director for Pakistan.
“Persistent, steady progress on the structural reform agenda will be necessary if Pakistan is to accelerate its growth recovery and lift millions more out of poverty.
” The latest Pakistan Development Update sets out recent developments across the economy and identifies risks and next steps facing Pakistan’s near-term future before focusing in on a handful of key development challenges.
However, significant risks remain and the country should guard against global slowdown by continuing to make key reforms, including expanding the electricity supply, boosting tax revenues, strengthening the business environment and encouraging private sector to invest.