“Despite political uncertainty in H1-FY15 and September 2014 floods in Punjab, macroeconomic indicators have improved during ongoing FY15”
Helped by lower global oil prices and steady implementation of its reforms programme, Pakistan’s economy has showed resilience, World Bank said in its latest report.
“Despite political uncertainty in H1-FY15 and the September 2014 floods in Punjab that affected agricultural crops, macroeconomic indicators have improved during ongoing FY15,” the report said.
The World Banks South Asia Economic Focus Spring 2015 on the topic “making the most of cheap oil” highlighting Pakistan’s economic performance, pointed out specific factors that ensured the progress in different sectors.
It was supported by a favourable slump in international oil prices, and stellar implementation of the International Monetary Fund (IMF) reform programme, reinforced by two Bank’s Development Policy Credits at the end of FY14 to restructure the energy sector, foster private and financial sector developments and improve social protection and revenue mobilization; growth recovery remains underway, with projected GDP growth now at 4.4-4.6%, the report said.
“The external position is fragile but improving. External current account deficit remains modest, at around 0.8% of GDP during H1-FY15 and on track to achieve about 1.2% of GDP by end-FY15,” it added.
This outcome, the World Bank said, was supported by strong workers’ remittances, which offset a chronically negative trade balance, a sustained decline in international commodity prices including oil and improved inflows in services account.
“Foreign exchange reserves held by central bank are considerably higher at $10.5 billion, inducing stability in foreign exchange market,” the bank said.
The fiscal deficit, the Bank said, was expected to be contained around 5% of GDP due to improved, but below target, tax collection, restricted current (especially power subsidies) and development expenditure, and small provincial surpluses. Federal tax collection growth is positive but slightly below target due to lower inflation and lower imported oil prices.
On the expenditure side, the World Bank said that much of adjustments were made on investment side. “Public debt remains above the 60% of GDP, a ceiling imposed by legislation, but on a decreasing trend. Inflation is moderating while the CPI inflation remained in single digit, and hovering around 6.8% by January 2015 and expected to fall to about 5.5% at end FY15. Core inflation is also softening,” the Bank added.
It said that Pakistan’s economic growth was showing signs of sustained recovery despite persistent energy constraints.
This, the report said, was driven mainly by better harvest of cotton, wheat and rice crops, better performance in services and positive, albeit weaker than expected, manufacturing growth.
“Nevertheless energy constraints and weak external demand continue to pose challenge for growth outlook. On the demand side, growth continues to be driven by private consumption supported by growing worker remittances,” the World Bank report said.
About Outlook of Pakistan’s economy, it said the medium-term framework FY15-18 also projects gradual growth recovery-cum-low inflation supported by fiscal consolidation and rebuilding of the external position.
“The GDP growth is expected to recover to 5% in FY18 and onwards. On the supply side, growth is expected to be driven by the services and large-scale manufacturing sectors which would benefit from decreased power load-shedding, improved business climate, and better availability of credit ensuing from fiscal consolidation,” the Bank’s report said.
On the demand side, it added that growth would be supported by strong remittances, with strengthened private investment, renewed export dynamism, and to an increase in public investment.
“Inflation which is already below double digit since last two fiscal years is expected to settle around 5% by FY16 owing to continued fiscal prudence,” the report said. The World Bank report further said that relatively steady international commodity prices and stable exchange rate were expected to help contain imported inflationary pressures.
The report further said that fiscal consolidation was expected to continue in medium-term on the basis of effort to raise tax revenue, curtail subsidies, and while at the same time increase the spending for key public infrastructure and human resource development.
The Bank report further said that revenues were projected to increase from 14.3% of GDP in FY14 to 15.4% in FY17, as a result a sound tax reform strategy.
On the expenditure side, the report said that energy-related budgeted subsidies keep being reduced with power tariff adjustments, favoured by the oil price windfall.
“The overall fiscal deficit will therefore decline from 5.5% of GDP in FY14 to 4.2% of GDP in FY17 and decline marginally thereafter,” the report added.
The Bank report further said that the current account deficit was expected to increase to 1.6% in FY17 – up from modest 1.2% of GDP in FY15.
“Faster growth will require higher imports (including oil) of raw materials. Export recovery and strong dynamism of remittances – despite some negative spillovers from lower oil prices in short to medium run on remittance catchment area of oil producing countries would keep financing the current account deficit in the medium term”, the report said.
The World Bank further said that the official foreign exchange reserves were expected to keep building from $9.2 billion by the end of FY14, and projected to reach to $15.4 billion (about 3.5 months of import coverage) by end FY15.
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