‘Progress in Pakistan at highest point’

Eight-year record broken; poverty reducing; WB says growth rate to remain between 4.7pc and 5.4pc in two years; delay in CPEC project, decrease in investment and exports, possible increase in oil prices and govt borrowing major risks; urges comprehensive reforms

ISLAMABAD: Pakistan has reached the highest point of its economic progress as the eight-year has broken and the poverty level is coming down while the growth in two years will remain between 4.7 percent and 5.4 percent.

Outlining three major risks hampering the future growth prospects of Pakistan, including delays in CPEC projects, the World Bank (WB) has projected the GDP growth to touch 5 percent during the current financial year against the officially envisaged target of 5.5 percent.

After Pakistan achieved the highest-ever growth rate of 4.7 percent in the last eight years, the WB says that Pakistan’s growth is likely to touch 5 percent in FY17 and 5.5 percent FY18 provided speedy implementation of $46 billion China Pakistan Economic Corridor (CPEC) and consistently pursuing structural reforms.

The WB’s latest report titled “Pakistan Development Update” released on Thursday also outlined three major risks for the country’s future growth, including delays in CPEC projects, possibility of increased oil prices in international market and declining exports.

The WB says that CPEC delays and inadequate revenue mobilisation are two risks to near-term growth. The gradual growth trend is underpinned by increased public investment through CPEC. “If CPEC is not implemented as expected in FY17, this will reduce the growth outlook,” the report warned.

Failure to follow the fiscal consolidation agenda would also affect growth in a number of ways. Reduced fiscal space may reduce public investment and the resultant increase in government borrowing may crowd out private investment, as witnessed in the recent past. More generally, slippages in fiscal consolidation would undermine confidence in reform momentum and Pakistan’s ability to absorb future shocks.

External and internal balances could be affected by large increases in oil prices, the WB states and added that third major risk was the fallout from Brexit could still harm Pakistan’s exports.

In the medium-term, Pakistan’s growth is expected to continue to accelerate, reaching 5 percent in FY17 and 5.4 percent in FY18.A moderate increase in investment (related to CPEC projects) is expected to supplement growth driven, primarily by public and private, consumption.

Energy reforms are expected to support higher growth in the industry and services sectors. The agriculture sector is forecast to recover from its poor performance in FY16. Subdued growth in exports and accelerated growth in imports are expected to lead to a widening of the current account deficit from 1.1 percent in FY16 to 1.7 percent in FY17. Like in previous years, this will be offset by remittancereserves are expected to continue to accumulate.

But for sustained growth, Pakistan must implement structural reforms and improve wellbeing for all. The government has continued to deliver on its structural reform programme, although challenges remain. Pakistan’s recent growth has been accompanied by a staggering fall in poverty. But growth and poverty reduction have not been translated into sustained improvements in wellbeing. Malnutrition is a particular concern, with Pakistan experiencing the third highest stunting rate in the world.

The WB also says that the low and stagnant investment rate, however, continues to pose significant challenges. After strong growth in FY15 of 13 percent, investment grew by only 5.7 percent in FY16. 

The ratio of investment to GDP is 15.6 percent — compared with an average rate in South Asia of 34 percent between 2010 and 2015. Pakistan’s much lower rate of investment is driven by its volatile security situation, energy shortages and poor business regulatory environment (now ranked 144 of 190 countries). The World Bank’s 2017 Doing Business report found that Pakistan improved four ranks in 2017 — placing it among the top ten ‘most improved’ countries — although this was preceded by a fall of 72 ranks between 2008 and 2016. The implementation of the federal and provincial governments’ joint action plan to improve the investment climate will be one important step towards reversing this long-term trend.

Over the last five years, public debt has remained above the 60 percent limit stipulated in the Fiscal Responsibility and Debt Limitation Act (FRDLA) of 2005. As of end-June 2016, total public debt stood at 67.4 percent of GDP, an increase of 3.3 percentage points from June 2015. Domestic debt continued to dominate the total stock in FY16. However, foreign currency public debt also increased significantly by 1.6 percentage points. This was likely due to the slight depreciation of the Pakistani Rupee against US Dollar, sizeable revaluation losses as a result of the depreciating US Dollar against Japanese Yen, disbursements under multilateral loans, the ongoing IMF programme, and substantial commercial borrowings. The debt-to-GDP ratio is expected to fall in the medium term.

Released twice a year, the Pakistan Development Update includes recent developments across the economy, the near-term outlook as well as special sections with a more detailed discussion of key development challenges for Pakistan.

“Pakistan continues to make good progress in restoring macroeconomic stability. Building on this Pakistan needs to push forward with deeper structural reforms that spread benefits more widely, and the World Bank stands ready to support the reforms agenda,” says Illango Patchamuthu, World Bank Country Director for Pakistan.

Growth acceleration will depend on the implementation of structural reforms, such as energy and taxation and implementation of the China Pakistan Economic Corridor (CPEC). In the long term, growth will be driven by increased investment in both physical and human capital, with increased focus on better nutrition, health and education outcomes.

The World Bank highlighted Pakistan’s success in reducing poverty over the last decade and a half – but contrasted this with the lack of progress in health, education and nutrition outcomes since 2010.

“Pakistan has made significant progress in reducing poverty over the last decade. Based on the revised poverty line adopted in early 2016, the percentage of people living below the poverty line decreased from 64.3 percent in FY02 to 29.5 percent in FY14. This reduction in poverty is corroborated when analysing other data, such as asset ownership”, says Muhammad Waheed, Senior Economist and lead author of the report. “But stunting rates have been unchanged for decades and health and education outcomes have shown little improvement since 2010. By reinvesting its economic gains in health and education systems, Pakistan can make growth matter for all its citizens”, the report concluded.