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January 13, 2018

Economic growth


January 13, 2018

Despite the fears about the economy, there is hope that the impact of the current stand-off with the US will not affect Pakistan’s economic growth trajectory. The bulwark against any external negatives seems to be Pakistan’s growing relationship with China, which will continue to invest in infrastructure and the power sector amongst other sectors in the country. In its economic forecast for Pakistan, the World Bank estimates that the economy will grow around 5.5 percent before being consolidated at around 5.9 percent for the medium term. The WB has predicted strong domestic consumption, an increase in investment and a recovery in the falling exports sector. However, it is still concerned about rising debts in terms of new infrastructure projects, potential uncertainty with respect to the general election and weak tax revenues. Industrial growth has continued to be less than predicted. However, it has still shown signs of recovery after the government decided to ensure that power outages remain minimal in the productive sector. Agricultural production has also recovered after a year of negative agricultural growth. One of the major concerns that has been addressed before is the widening current account deficit, which has increased from 1.7 percent to 4.1 percent of GDP.

The current account deficit is a major cause for concern for the medium-term future of the country – with further borrowing expected. However, fears that the suspension of US military aid will cause a sudden crisis in the economy have for now been allayed. The importance of US aid has declined from what it was in the early 2000s. China is now one of the main sources of inflow of foreign exchange into Pakistan, with Chinese investment a much more substantive input into the economy than the US military aid ever was. Pakistan’s economic growth, however, will remain around one to one and a half percent less than the WB’s estimate for South Asia. Domestic bottlenecks are becoming less and less important in a favourable environment for international investment. Agricultural growth will continue to be limited by adverse weather across the region. Similarly, remittances will remain slow and pose another risk factor in terms of the current account deficit. The trend of increasing current account deficits is not just limited to Pakistan, but that doesn’t make it any less potent. There are still questions over whom Pakistan would rely on in the case of another foreign exchange crisis. A more hostile US could influence the World Bank, IMF and ADB to restrict new financing options for Pakistan or impose tighter conditions in case there is need for further borrowing to subsidise the expanding current account deficit. This is why the country’s economic policymakers cannot rest on their laurels after the WB’s robust predictions for economic growth. Economic growth alone may not be enough to prevent another liquidity crisis in the economy.

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