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Pak economy among top performers of South Asia but challenges remain

Top Story

May 25, 2017

KARACHI: Pakistan’s economy is among the top performers of South Asia with the GDP growth expected to reach 5.2 percent in FY17, a substantial increase from 4.7 percent in FY16, says the World Bank in its latest report on Pakistan.

The report further said despite this strong overall growth, external and fiscal balances have deteriorated in the past nine months. Pakistan has seen a weakening of several of the macroeconomic indicators during the first nine months of FY17 that had improved as a result of the reforms implemented at federal and provincial levels during the last three fiscal years. During this period, the current account deficit has widened due to weak export performance and a marginal decline in remittances. These developments suggest that renewed attention and efforts are warranted to protect Pakistan’s hard-won macroeconomic stability. Nevertheless, Pakistan’s economic growth is expected to accelerate in FY17. In addition to the general conditions favoring economic growth across South Asia, Pakistan enjoyed increasing consumer and investor confidence, in part as a result of the successful conclusion of the IMF-EFF program. In late 2016, the country also tapped into international markets by issuing a US$1 billion 5-year Sukuk Bonds with a lower interest rate than a similar bond issued two years ago. The economy was further supported by strong domestic consumption, some recovery in agricultural production and a marginal recovery in foreign direct investment (FDI) flows. Recent debates in media have underscored flaws in Pakistan’s measurement of GDP and needed improvements

On the other hand, the economy continues to suffer from low investment and savings rates. Total investment fell by 0.3 of a percentage point in FY16 to 15.2 percent, while national savings increased by only 0.1 of a percentage point over the same period to 14.6 percent of GDP. While these rates are low, even by regional standards, multiple structural factors explain this performance. Drivers of Pakistan’s low investment rate include an uncertain security situation and the global slowdown affecting FDI. Entry and administrative barriers in various sectors and an overall high cost of doing business have also constrained investment.

On the supply side, the agricultural sector, comprising one-fifth of GDP, is expected to recover to 3.4 percent growth in FY17 after contracting by 0.2 percent in FY16. Cotton production suffered a blow in FY16, falling by 30 percent due to abnormal rainfalls, pest attacks in southern Punjab and low cotton prices. As a result, discouraged farmers invested less in cotton in FY17, leading to an immediate 15 percent fall in the sowing area. Instead, plantings switched to water-intensive sugarcane, whose production is expected to increase by 9 percent in FY17.

Large-scale manufacturing (LSM) has grown at 4.1 percent, slightly lower than the last year. Some sub-sectors exhibited a drag, including jute goods, cigarettes, cars. On the other hand, LSM growth was supported by sugar production, pharmaceuticals, construction-related industries, automobiles and fertilizers, which together make up over 30 percent of LSM.

The services sector is the largest and most reliant contributor towards supply-side growth with its share in GDP reaching about 59 percent in FY16. The sector itself is expected to grow by 5.6 percent in FY17, a similar rate to the 5.7 percent growth in FY16. Growth in the sector remains healthy due to the recovery in agriculture and steady growth in industrial activity, and is supported by the transport sector. Specifically, the largest sub-sector within services, wholesale and retail trade will benefit from a significant increase in sugar production and slight cotton recovery combined with an expected boost in LSM in the second half of FY17. Transport is also expected to grow based on higher sales and imports of commercial vehicles and petroleum products in addition to the additional demand created by CPEC.

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