ISLAMABAD: Showing optimism on Pakistan’s economic prospects, World Bank (WB) has jacked up Pakistan’s economic growth forecast up to 4 percent of the GDP against 3.1 percent of International Monetary Fund (IMF) and 3.6 percent of Asian Development Bank (ADB) for ongoing fiscal year 2013-14.
It also termed government borrowing as biggest risk for Pakistan’s banking sector and said government should have problems in repayment of loans that could bring banks balance sheets under stress.
Pakistan has a relatively sound banking sector remains extremely resilient, but vulnerable to reverse shock transmission as risk are not adequately reflected.
WB report South Asia Economic Focus Spring 2014 Time to Refocus launched on Wednesday has pointed out three sources of risk that has remained worrisome i.e Pakistan imports more than it exports being constrained by low productivity and under-competitiveness, access to reliable energy remains uncertain and unwieldy business regulation continues to constrain enterprise.
This report is a product of the Office of the Chief Economist for the South Asia Region. Markus Kitzmuller (Economist, SARCE) under the oversight of Martin Rama (Chief Economist, South Asia Region) prepared the report.
During a video conference arranged at country offices of WB in Pakistan, Bangladesh and Nepal for journalists, Markus Kitzmuller and Martin Rama, replying to a question on higher GDP growth projection against IMF and ADB said their projections was based on optimism due to batter economic performance of Pakistan under IMF programme.
However they were also of the view there exists margin of error about the accessing the GDP.
Recent Economic Developments: According to the findings of the report, Pakistan’s economy, though still weak, or below potential has begun to show signs of improvement. Real GDP is projected to grow at 3.6-4.0 percent in FY14 driven by dynamic manufacturing and service sectors, better energy availability and early revival of investor confidence.
Nascent optimism, however, contrasts markedly with the slump in private investment last fiscal year, the lowest level in two decades.
The external position is fragile but strengthening: The current account deficit is small, at around 1 percent of GDP by end FY13. In contrast, net official foreign exchange reserves declined to the equivalent of 1.3 months of imports at the end of June 2013 (bottoming out at 0.6 month of imports by the end of November 2013), though they had risen to above 1.1 month of imports as of March 26. This is partly due to the fact that since the second quarter of FY14, the State Bank of Pakistan (SBP) increased its policy rate and has started to purchase dollars on the spot market, turning decisively toward rebuilding the external position.
Monetary tightening has been underway since end 2013: The SBP increased the policy rate by 50 basis points successively in September and November 2013 to deal with two concerns, a continued deterioration in the balance of payments position and a worsening of the inflation outlook during Q1-FY14. Real weighted average lending rates have been only marginally positive in recent months.
Three sources of risk remain worrisome: Pakistan imports more than it exports (the latter being constrained by low productivity and under-competitiveness), access to reliable energy remains uncertain and unwieldy business regulation continues to constrain enterprise. Investors’ concerns over governance issues, energy and prevailing security issues keep Foreign Direct Investment flows and private investment low, which also affects foreign reserves. The troubled domestic energy sector continues to labour under a complex inheritance from its circular debt, which might affect the magnitude of fiscal adjustment. On the other hand, Pakistan’s emerging markets.
Bonds Index Plus (EMBI+) risk spread: It keeps declining from the high levels shown at the start of the new administration. Market confidence in the government’s programme and its steady implementation is bearing fruit, as the EMBI has almost halved from 1,011 basis points in March 2013 to around 468 basis points as of March 26, 2014. The government intends to benefit from this and return to the international markets with the placement of a $500 million-$1 billion Eurobond in the fourth quarter of the current fiscal year. Revenue collection is expected to be close to the revised target of Rs 2,345 billion. On the basis of performance during the first half of the year, the seasonality in fiscal transactions and the expected impact of government’s policy actions, it is projected Federal Board of Revenue tax collection would not only recover from the exceptionally poor performance of FY13, but its tax-to-GDP ratio would much exceed the level achieved in FY12 and be quite close to its annual revised target (10.3 percent of GDP).
Overall the fiscal deficit is expected to fall to 5.8 percent in FY14 of GDP, from 8 percent last year. About half of the effort is expected to come from revenue increases and the other half from the reduction of untargeted power subsidies and recurrent spending.
Provinces are also expected to generate small fiscal surpluses. Taking into account the additional fiscal space, along with increased development spending, the fiscal deficit is expected to reach 4.5 percent of GDP in FY16. Expected budget support from multilateral donor agencies (i.e WB and ADB) should also improve external financing for the budget, but repayments, especially to the IMF will also be higher. In net terms, the external financing position in FY14 is expected to be substantially better than in FY13. In the medium term, Pakistan’s real GDP growth is projected to regain momentum slowly to reach 4.4 percent by FY16. At the sector level, the initial economic expansion will be supported by less load shedding and resilient remittance complemented on the supply side by manufacturing exports and dynamic services. Official figures place inflation in single digits by end-2013, but some pressures related to hikes in administered prices for provisions such as oil, electricity and gas, might put pressure by end-fiscal year toward a 9-10 percent rate. As fiscal consolidation and monetary tightening proceed, average inflation should approach its medium-term target 84 percent over medium-term. The current account deficit is projected to approach a modest 1 percent of GDP by end-FY14 and remain so during the projection period. Higher financial inflows are expected to be attracted by lower country risk, privatisations, new trade relations with neighbours and the opening of special economic zones and multilateral flows.
Official foreign exchange reserves are expected to build from $6.0 billion by the end of FY13 to about $16 billion by end-FY16 (equivalent to three-month of imports).
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