ISLAMABAD: The World Bank on Tuesday said Pakistan’s economy is showing signs of sustained recovery, nevertheless energy constraints and weak external demand continue to pose challenge for the growth outlook.
Helped by cheap international oil prices and steady implementation of its reforms programme, the economy has showed resilience, according to the ‘South Asia Economic Focus Report’ released by the World Bank resident mission.
The growth is driven mainly by better harvest of cotton, wheat and rice crops; better performance in services and positive (albeit weaker than expected) manufacturing growth. On the demand side, growth continues to be driven by private consumption supported by growing remittances, the report said.
Supported by private and financial sector developments and improved social protection, revenue mobilisation; the growth recovery remains underway, with projected GDP growth row at 4.4 per cent to 4.6pc, said the report.
A gradual recovery to around 4.6pc growth by the end of 2015-16 will be aided by low inflation, fiscal consolidation and the rebuilding of the external position. But its success will remain contingent on tackling key growth constraints: power load-shedding, a cumbersome business environment and low access to finance, the report added.
The report said that the GDP growth is expected to recover to 5pc in fiscal year 2018 and onwards.
On the supply side, growth is expected to be driven by the services and large-scale manufacturing sectors, which would benefit from decreased power load-shedding, improved business climate, and better availability of credit ensuring from fiscal consolidation.
On the demand side, growth will be supported by strong remittances, with strengthened private investment, renewed export dynamism, and to an increase in public investment.
Inflation, which is already below double-digit since last two fiscal years, is expected to settle around 5pc by fiscal year 2015-16 owning to continued fiscal prudence. Relatively steady international commodity prices and stable exchange rate are expected to help contain imported inflationary pressures, the report said.
Listing three challenges, the World Bank said the outlook is subjected to downside risk.
First is the prospect of an early reversal of the fall in oil prices; second is the replication of political events of the first semester that keep FDI flows and private investment low, which also affects foreign reserves and privatisation programmes.
Third is the continuation of a troubled domestic energy sector that continues to endure a long-due complex inheritance on its circular debt.
Its accumulation might affect the magnitude of the fiscal deficit, the report noted.
The fiscal deficit is expected to be contained around 5pc of GDP due to improved, but below target, tax collection; restricted current (especially power subsidies) and development expenditures and small provincial surpluses.
On the expenditure side, much of adjustments are made on investment side. Public debt remains above 60pc of GDP, a ceiling imposed by legislation, but on a decreasing trend.
The report said that the external position is fragile but improving.
The external current account deficit remained modest, at around 0.8pc of GDP during the first half of 2014-15 and on track to achieve about 1.2pc of GDP by the end of this fiscal year.
The fiscal consolidation is expected to continue in medium-term on the basis of effort to raise tax revenue, curtail subsidies, and while at the same time increase the spending for key public infrastructure and human resource development.
Revenues are projected to increase from 14.3pc of GDP in FY14 to 15.4pc in FY17 as a result of sound tax reform strategy.
On the expenditure side, energy-related budgeted subsidies being reduced with power tariff adjustments, favoured by the oil price windfall. The overall fiscal deficit will therefore decline from 5.5pc of GDP in FY14 to 4.2pc of GDP in FY17 and decline marginally thereafter, the report said.
The current account deficit is expected to increase to 1.6pc in FY17 — up from modest 1.2pc of GDP in FY15.
Foreign exchange reserves, which reached 2.5 months of imports in Dec 2014, have taken the country out of the danger zone, the report said.