Political uncertainty major risk factor in Pakistan’s economic prospects: WB

ISLAMABAD: A World Bank (WB) report states that political uncertainty remains an important risk factor in Pakistan while the promised Chinese investment is contingent on improvements in security and the fulfillment of institutional, regulatory, logistical and other commitments made by Islamabad.
“Political uncertainty remains an important risk factor in Afghanistan, Bangladesh, Nepal, and Pakistan,” states WB’s report ‘Global Economic Prospects’ released on Thursday.The report says that in Pakistan, an easing of political tensions toward the end of last year has helped already strong service sector growth, and the recent trade and investment agreements with China worth $28 billion in infrastructure and energy projected migrants increasing from about 1 million in 2010 to around 2 million in 2013.
In India, although diesel prices were liberalised, periodic increases since November in excise taxes on diesel and petrol to bolster government revenues and meet fiscal targets have meant that domestic fuel prices have been relatively slow to fall. The extent of pass-through from international oil prices in India is estimated at 33 and 20 percent for diesel and gasoline respectively, but is higher in Pakistan and Sri Lanka (World Bank, 2015m), where reductions in (administered) fuel prices have helped to push inflation to multi-year or record lows, the WB’s report says.
In Pakistan, the government has remained focused on fiscal tightening as part of conditions attached to the IMF’s Extended Fund Facility loan programme. The decline in global oil prices, according to WB, is helping reduce spending on subsidies and contingent liabilities at state-owned companies, and has enabled adjustments in administered energy prices to the benefit of consumers.
Nevertheless, deficits remain large and debt levels high in Pakistan and in several countries in the region, in part reflecting poor tax policy and weak tax administration. Together, these have contributed to some of the lowest tax-GDP ratios among developing countries and weakened long-term fiscal sustainability.
In Pakistan, an ambitious but piecemeal privatisation programme has been launched. Severe energy shortages in January 2015 exposed the slow progress thus far on energy reforms. However, almost half ($15.5 billion) of recent investments agreed with China in April are estimated to be channeled into coal, nuclear, renewable energy and hydropower projects in the next few years. These are expected to add some 10,000mw in electricity generation to the national grid (about half of current installed capacity) by 2017, which should help ease energy constraints.
In Pakistan, the heavy reliance of the government on the banking sector for budgetary borrowing is crowding out private sector credit growth. In the absence of measures to address problem loans on banking sector balance sheets, rising global funding costs (as U.S. policy rates rise) could impede salready weak credit growth and a strengthening of investment.
In Pakistan, in the absence of concerted tax policy reforms that successfully raise tax revenues (particularly direct taxes), the ability to meet fiscal deficit targets is likely to depend on the ability of the government to restructure and privatise loss-making enterprises, the report made it clear.
In Pakistan, energy-pricing reforms are particularly important given the country’s heavy dependence on imported oil in electricity generation, and heavily subsidised electricity tariffs that cost 1.2 percent of GDP in FY 2013-14.
Energy shortages in Pakistan, which have weighed on investment, and activity in recent years, are expected to diminish gradually as investment in energy projects increases supply. Credit growth is also expected to pick up, helped by fiscal consolidation. Coupled with solid growth in remittances, and recovering manufacturing and service sector growth, GDP growth is forecast to rise from 3.7 percent in 2015-16 to 4.5 percent in 2017-18
However, remittances growth decelerated in 2014, possibly reflecting less use of formal transfer channels. Remittances to India were broadly flat during 2014 and may reflect the diversion of investment-oriented remittances
Remittances inflows have been particularly strong in Pakistan, amounting to $13.3bn in the first three quarters of FY2014-15 (a 15 percent increase from a year earlier), helping shore up consumption in the face of energy bottlenecks that have hampered production and exports.
Lower oil prices have improved the terms of trade and helped narrow regional trade deficits. Trade deficits in Bhutan, Maldives, Pakistan and Sri Lanka should see the largest improvements, given evidence of stronger short-term response of imports to oil price movements.
External balances in the region have also been supported by strong remittance inflows. In the case of Pakistan, remittances have been a key factor in helping contain the current-account deficit at an estimated 1.2 percent of GDP in FY2014/15.
Together with the strong economic prospects of some economies, strong capital inflows, and healthy or improving current account balances, local currencies have broadly held their value against the U.S. dollar.
Private investment should also improve, but at a slower pace as high levels of NPLs (Non Performing Loans) on banking sector balance sheets in Bangladesh, Bhutan, India and Pakistan hold back the recovery in credit growth.
Inflation has fallen to record or multi-year lows in the region. Partly reflecting favourable base effects and the impact of lower energy and food prices, the disinflation trend has been further reinforced by relatively strong local currencies, and has facilitated policy easing in India and Pakistan.