ISLAMABAD: Youth unemployment in the country is expected to slightly decline in the near term as a result of the implementation of projects under the China-Pakistan Economic Corridor (CPEC), a United Nations study reveals.

The ‘World Economic Situation and Prospects 2017’ says that economic growth in Pakistan is projected to remain robust, above five per cent, and economic activity will be driven by strong consumption, a supportive monetary policy stance and rising investment and infrastructure projects boosted by the CPEC.

Fiscal policy in Pakistan is gradually becoming more expansionary, and thus deficits are expected to remain elevated. Fiscal deficits are expected to remain elevated in most of the economies in South Asia, and recent large increases in wages and other benefits in the public sector are likely to further reduce fiscal space, the report points out.

In fact, most economies are constrained by very low tax-to-GDP ratios in comparison to other developing regions and high debt-to-GDP ratios. Despite increasing efforts to strengthen tax revenues and the efficiency of the whole tax system, significant delays and problems remain, it says.

Amid relatively low inflationary pressures, monetary policies in South Asia are moderately accommodative. Fragilities in the banking sector and stressed balance-sheets of the corporate sector remain important challenges for some economies.

Although countries should try to avoid a sudden tightening of monetary and liquidity conditions in the outlook period, policy measures will critically depend on the evolution of external factors, such as oil prices, notes the report.

Most South Asian governments have announced relatively tight fiscal stances. However, during the implementation, the governments have tended to provide more support to their economies, responding to large development needs and political pressures.

Despite the favourable outlook, South Asian economies face several downside risks.

On the domestic front, the reform agenda could experience setbacks in some countries, while political instabilities might dampen investment prospects. Structural reforms in labour markets, financial sectors, public finances and competition are crucial to increasing productivity growth across the region, it says.

Heightened regional geopolitical tensions could also weigh on the outlook. On the external front, potential renewed episodes of high financial volatility, including a sudden surge in external borrowing costs and large capital outflows, could significantly increase the difficulties to roll over debt, especially in countries with relatively low financial buffers and high debt denominated in United States dollars.

South Asia is the fastest-growing developing region and its economic outlook remains largely positive, benefiting from robust private consumption, a modest pickup in investment and the continuing implementation of domestic reforms. Macroeconomic policies have also played a positive role: monetary policy continues to provide support to economic activity, while the fiscal policy stance remains moderately tight but with some degrees of flexibility.

Against this backdrop, regional GDP growth is expected to remain robust, reaching 6.9pc in 2017 and 2018, following 6.7pc in 2016. However, the relative weakness of investment demand in some countries underscores the need for continuous reform efforts, the report says. After slowing to a multiyear-low of 6.2pc in 2016, regional inflation is expected to remain relatively low and stable.

Overall, the positive economic outlook will likely enable further progress in labour market indicators, albeit gradual and moderate, and a reduction in poverty in the coming year.

Published in Dawn January 19th, 2017