LAHORE: The World Bank issued a detailed report on South Asian economy unveiling many things for policy makers to formulate better export, inflation containment, banking sector, and other economic policies. Pakistan, being a developing South Asian country, can learn a lot from the report.
Energy subsidies in Pakistan have been quite higher than other countries, which nurture tough fiscal challenges with price shift in international markets.
Data from archives of 2000 shows that in response to a 10 percent increase in global oil prices, consumer price inflation (CPI) had increased by 0.3 percentage point in Pakistan.
Many factors contribute to a weak correlation, including subsidies or price caps on domestic fuel prices.
Former PM Imran Khan announced fuel and electricity price relief in February 2022. While these popular decisions can help reduce fluctuations in domestic prices and some political advantages, such subsidies also constitute a direct burden or hidden liability on government’s budget, which could increase fiscal vulnerabilities.
Price subsidies also tend to be larger on the consumer side than on the producer side. In Pakistan, between 20-30 percent of the consumer’s energy usage consists of crude oil-based sources, compared to close to half of the producers’ usage.
Producers may be unable to pass higher input costs to consumers.
In India, Pakistan, Sri Lanka, and Bangladesh, prices of food and fuel for utilities correlate only weakly with global oil prices. South Asian countries are also experiencing lingering supply constraints.
The war in Ukraine and rising energy prices will likely increase transportation time and costs, further adding to backlogs and delivery time.
Banks in Pakistan have focused on lending to the most creditworthy borrowers, with almost 70 percent of the loan book pivoted towards the corporate segment, but microfinance banks (MFBs) that lend to individuals and micro, small, and medium enterprises (MSMEs) have seen declines in asset quality.
The phase out of moratoriums and other relief measures can drive defaults higher on existing loans. Because of a higher initial capital adequacy ratio and relatively low capital impact, Pakistan would have the highest capital adequacy ratio after the impact.
Industrial production in Bangladesh and Pakistan is above pre-pandemic levels and has increased by more than the world average.
In Afghanistan, India, and Pakistan, the gender gap in job recovery rates is more than 10 percentage points, indicating that women lag significantly in labor market recovery.
In March, which is the first whole month since the Ukraine war started, inflation in Pakistan continues previous trends, with elevated inflation in edible oils and fuel-related categories, while inflation in wheat is subdued at 5 percent.
Pakistan experienced mildest exports contraction in the region in 2020, and the recovery led by the textile sector was also the most rapid.
Pakistani goods exports fell 54 percent year-over-year in April 2020 at the height of the pandemic.
Since late 2020, the textile sector, which makes up more than 60 percent of total goods exports, has led the recovery.
Covid restrictions also loosened earlier in the country than other Asian countries.
This helped Pakistan divert orders from competitors and keep goods exports 40 percent above January 2019 levels. Knitwear, cotton fabrics, and bed-wear are some of the commodity groups enjoying export subsidies, in addition to a sharp reduction in import tariffs on intermediates for the textile sector, and a favorable exchange rate in the past years.
The government is also providing subsidies and incentives to other sectors to diversify exports and reduce the dependence on textiles.
Additional policies were put in place to incentivise industries to open to new markets, especially in areas such as pharmaceuticals, engineering products, and chemicals.
Going forward, the country faces challenges of diversifying exports and boosting its low exports-to GDP ratio (currently around 10 percent), for example, through a tariff rationalisation to encourage manufacturers to export and compete in global markets.