ISLAMABAD: Reform delays in Pakistan, such as entrenched political obstacles to privatisation, would compromise future productivity and dampen growth prospects, and may also increase fiscal pressures as budget projections take into account proceeds from strategic disinvestments, the World Bank has said in a report.
If the planned divestment from the state-owned enterprises (SOEs) materialises in Pakistan, it would contribute to further fiscal consolidation, according to the latest update of the ‘Global Economic Prospects’ report published on Tuesday.
The bank said that chronic energy deficiencies in Pakistan have weakened foreign direct investment, but a pick-up was expected with the start of the China-Pakistan Economic Corridor (CPEC) programme. Nonetheless, domestic investment in the country remains weak.
On the positive side, the report said Pakistan would benefit from expected improvement in power supply and security situation. Investments under the CPEC would provide a boost to demand in the short run, and over time alleviate transportation bottlenecks and energy shortages, it said.
Addressing energy bottlenecks in South Asia remains critical for sustaining the region’s long-term growth. In Pakistan, which has an annual energy deficit of about 5,000 megawatts, power shortages may have shaved about four percentage points off GDP growth per year.
Ongoing monetary accommodation would support an expansion of credit for domestic borrowers and Pakistan was expected to continue on its path of fiscal consolidation, the report said.
The report said GDP growth picked up to 4.2 per cent in 2015-16 — its highest pace in seven years. This pick-up was supported by several positive factors: an improving security situation, lower oil prices, higher remittances, an acceleration in credit growth and rising public investment.
Pakistan’s Extended Fund Facility arrangements with the International Monetary Fund (IMF) remains on track, and the fiscal deficit fell to 5.3pc of GDP in 2015 from 8.4pc in 2013 as revenues improved and recurrent expenditures were curtailed, the report said.
The report painted a positive outlook for South Asian economies, stating that growth in South Asia was expected to remain robust at 7.1pc in 2016, picking up to 7.3pc in 2018.
“Growth in South Asia has been remarkably strong, and with it, a steep decline in poverty rates over the past two decades. However, some of the tailwinds that have supported South Asia’s recent strong performance due to significantly lower oil prices are likely to fade over the medium term,” it added.
External risks include weaker-than-expected global trade and an unexpected tightening of global financing conditions. South Asian economies will not be immune to such developments, even though the region is less integrated with global markets than other developing regions.
Heightened volatility in financial markets could lead to a reversal of capital flows and debt rollover difficulties. Countries in the region with weaker buffers and exposure to international capital markets are likely to be the most adversely affected.
Although the region’s systemic banks do not rely heavily on wholesale funding, vulnerabilities in bank balance sheets may lead to financial stress and weigh on lending. Some corporate borrowers, particularly state-owned enterprises, are facing sizable losses, which could eventually turn into non-performing bank loans and contingent government liabilities in India and Pakistan.