Pakistan to gain from favourable economic conditions, says WB

ISLAMABAD: The World Bank (WB) said on Thursday that Pakistan stands to benefit from three tailwinds over the short- to medium-term, including rising investments from China under the China-Pakistan Economic Corridor (CPEC) agreement, the anticipated return of Iran to the international economic community, and persistently low international oil prices.

The WB also projected real GDP growth of 4.5 percent for Pakistan during the current fiscal year, which was lower than officially anticipated growth by the country’s economic managers.

The World Bank’s report titled, “Global Economic Prospects in 2016”, stated that Pakistan stands to benefit from three tailwinds over the near- to medium-term, with average growth projected at 5.5 percent over the medium-term.

The CPEC will connect western China to the Arabian Sea via the new port of Gwadar. Estimated at around $45 billion of investment until 2030, the initiative will finance a series of transport infrastructure projects ($11 billion, mostly public investment) and energy projects ($33 billion, mostly private)," the report added.

The WB report made it clear that stronger growth and investment in Pakistan is predicated on reforms to strengthen the business climate, an improvement in security situation, implementation of the CPEC and an associated easing in energy constraints.

“These developments might not materialise as expected,” the WB warned.

“Fiscal risks are elevated across the region. In Pakistan, with national elections due in 2018, hard won fiscal consolidation gains may be lost if spending ramps up in the pre-election period.

In addition, sovereign guarantees associated with the CPEC could pose substantial fiscal risks over the medium term,” the WB added.

For achieving macroeconomic stability, the WB states that elsewhere in the region, macroeconomic adjustment in Pakistan under an International Monetary Fund programme is progressing, while efforts to crack down on violent crime in Karachi, the country’s industrial and commercial hub, are supporting investor confidence.

The CPEC agreement, signed in 2015, has further bolstered investor optimism, and, if implemented, has the potential to lift long-term growth. Pakistan once again tapped the international capital markets and launched a $500 million Eurobond in September 2015, with the same maturity and coupon as its issue a year earlier.

However, both India and Pakistan have been on a path of fiscal consolidation over the past three years, and fiscal restraint is curbing demand-side pressures.

Lower in consolidation has enabled central banks in India and Pakistan to cut policy rates to support activity and, in Sri Lanka, keep policy rates at record lows.

The currencies of India, Pakistan and Sri Lanka, which had appreciated in real terms since 2013, have stabilised in recent months.

Pakistan’s current account deficit has continued to narrow, reflecting lower oil import cost and strong remittance inflows.

Pakistan has also made progress in reining in its budget deficit from 8.4 percent of GDP in FY2013 to 5.3 percent in FY2015 including grants.

Industrial activity has slowed in India and Pakistan, while external trade remains weak. Inflation has moderated sharply across most of the region, except in Bangladesh where it has contributed to an appreciation of the currency in real terms.

In Pakistan, the authority to grant tax exemptions has been transferred from the Revenue Board to parliament while efforts continue to implement an ambitious tax reform agenda.

The central bank, with IMF assistance, is gradually strengthening monitoring of financially stability risks, and is in the process of instituting a modern deposit insurance scheme in line with international best practices.

Investment growth is expected to continue strengthening in India due to government efforts to accelerate infrastructure development and boost Public-Private Partnerships (PPPs), and in Pakistan due to CPEC implementation, the WB stated.

South Asian countries face substantial challenges on the fiscal front. Generally, fiscal deficits and public debt levels remain high in the region including in India, Pakistan and Sri Lanka.