World Bank predicts inflation at 6pc next year

KARACHI: The World Bank (WB) on Thursday raised alarms for Pakistan’s economy and predicted that inflation would increase to six percent next year as it linked Pakistan’s bullish economic prospects with continuation of reforms to address the current and fiscal account deficits. 

“Despite an increase in macroeconomic imbalances during FY17, growth is projected to increase moderately and touch 5.8 percent by FY19,” the Bank said. “This outlook is contingent on maintaining macroeconomic stability as well as steady progress in implementing the main pillars of the government’s medium-term reform program which targets key constraints to growth.” 

The World Bank, in its twice-a-year Pakistan Development Update, said macroeconomic imbalances have significantly worsened over the last nine to 12 months.   It said long-terms fiscal reforms, especially those aiming to broaden the tax net and ensure tax compliance, would improve fiscal outcomes, while reforms to improve the competitiveness of the export sector and the economy will contribute to improved external balances and attract more foreign direct investment to meet the country’s external financing needs.     

“These medium-term reforms are crucial to address stubborn structural imbalances and need to be implemented in parallel with the shorter-term measures to restore and maintain macroeconomic stability,” it added. 

Illango Patchamuthu, country director Pakistan of the World Bank Group, said democracy is getting mature in Pakistan, which would be helpful for sustainable economic growth.  Patchamuthu said the economic imbalances are growing due to widening fiscal and external imbalances.   

“Policy adjustment is required to reverse the imbalances and restore and maintain macroeconomic stability,” he said at the report’s launch ceremony.  The bank’s official acknowledged the progress the country made in making the economy more stable in recent years. 

“In order to sustain this hard-won achievement, Pakistan will need to continue with economic reforms and pursue policies that make the country compete better in global markets,” he said in a statement.   The World Bank expected pressure on the current account to continue as the trade deficit will persist during FY2018 and FY2019.  

“This situation could potentially become unsustainable in the absence of timely corrective policy measures,” it added. “Exports are expected to recover during FY18 and FY19 as supply side factors ease, including an improved electricity supply and low domestic lending rates. The slowdown in imports is mainly due to the high import base in FY17.”  

The Bank, however, said import growth is linked to investments in China-Pakistan Economic Corridor (CPEC) projects.  It projected a moderate growth in investment due to higher capital expenditures by the government and an increase in foreign direct investment and external loans for CPEC projects. 

The World Bank said growth in remittances will remain subdued, “given the gradual economic recovery projected in the GCC (gulf cooperation council) countries.”   The bank said the upcoming strategic trade policy framework (2018-2023) would define the country’s intention to reverse the decline in exports.  

“Policy framework should include reforms in tariff rationalisation, diversification, and integration with global value chain,” it added. “A flexible exchange rate should help the economy adjust to these pressures.” 

The World Bank expected fiscal deficit to widen in FY2018 and FY2019 due to general elections. The average fiscal deficit was recorded at 6.3 percent during the previous two election cycles, it said.  The Bank stressed the need of short to long term fiscal reforms, including broadening of tax base. 

It called for a comprehensive review of tax policy, saying currently it is against the key principles of neutrality, fairness and transparency.   “A fully automated and able tax administration is imperative to take advantage of modern IT infrastructure that uses the available data to reduce chances of tax evasion,” it said. 

The World Bank said the government changed its pattern of budget financing to short-term from long-term borrowing during the last fiscal year.  “Such a financing strategy is not in line with the strategic guideline of lengthening the maturity profile of domestic debt, as stipulated under the Pakistan medium-term debt management strategy 2015/16-2018/19,” it added. “High levels of short-term borrowing pose renewed refinancing and reprising risks.”