ISLAMABAD, Dec 7: The World Bank has identified some ‘major risks’ to Pakistan’s economy in the long and short terms owing to continuously rising fiscal and current account deficits and structural bottlenecks.

“The debt dynamics are vulnerable to downturns, inflation target for the year will be missed and the performance of exports and revenue is worrisome,” says the World Bank in its outlook on Pakistan based on latest economic results up to October 2006. Based on current trends, World Bank projects that average inflation during the fiscal year 2006-07 would be in the range of 7-7.5 per cent.

The bank said the poverty rate by the end of 2004-05 stood at 29.2 per cent, a decline of only five per cent from 34.4 per cent in 2000-01 and was well above 23.9 per cent estimated by the government of Pakistan. The bank said its poverty estimate of 29.2 per cent was just 0.8 per cent better than 30 per cent estimated in 1998-99 when President Musharraf assumed power. It said the poverty rate had increased to 34.4 per cent in 2000-01. The urban and rural rate of poverty incidence in 2004-05 stood at 19.1 per cent and 34 per cent, respectively.

"Pakistan's economy in the short run faces the risk of a continued widening of the current account deficit and difficulties in taming persistent inflation. If first quarter trends in the trade balance continue, the current account deficit could end up in the range of five to 5.5 per cent of GDP for the entire fiscal year."

Over the first quarter of 2006-07, the trade deficit has widened by a further $3.2 billion in spite of a deceleration of import growth to 13.4 per cent. “A significant development is that over the first quarter, exports grew by only 2.8 per cent to $4.3 billion,” the bank said, adding the exports of both textiles and other goods declined.

Over the first quarter of 2006-07, the current account deficit has increased to $2.7 billion, roughly equal to half the magnitude of the full year deficit in the previous year. "Inflationary pressures have continued to persist, but core inflation has started declining," said the bank.

In the current fiscal year, the reliance on domestic borrowing has increased, with government borrowing from the central bank reaching Rs86 billion at end of October 2006, an amount roughly equal to two-third of the amount targeted for the whole fiscal year.

The bank criticised the government for allowing institutional investors to invest in national savings to finance the deficit at a higher cost and said that the opening of NSS to the institutional investors might have an adverse effect on the stock market as mutual funds had begun switching out of capital markets to invest in NSS.

“Pakistan’s tax system continues to under-perform in fundamental ways,” said the World Bank, adding that the fiscal sustainability of increases in spending hinges on improvements in revenue collections. “The tax revenue at 10.3 per cent of GDP and accounting for two-third of total revenue remains low against government's spending needs.”

“The revenue structure is heavily skewed towards indirect taxes, with six major items alone accounting for more than half of the total collection in indirect taxes. Moreover, agriculture and services sectors remain outside the tax net, depriving the system of additional revenue resources,” the bank observed.

Sub-national revenue collection, the bank says, is weak, amounting to less than one per cent of GDP. This is partly due to weaknesses in the tax policy, and partly due to limited incentives of the provincial governments to collect their own taxes.

Excess liquidity in the economy has led to increases in domestic demand, which has been the driving force behind the economic growth witnessed over the last few years. The availability of and access to cheap credit has allowed households to finance consumption needs, businesses to expand, contributing to an increase in investment levels to 20.8 per cent of GDP from 18.1 per cent the previous year.

“Pakistan will have to raise its investment rate above the current levels and raise domestic saving rates to sustain higher growth rate,” the concluded.