KARACHI: The World Bank projects that Pakistan’s GDP growth rate will be 5.5 per cent and 5.8pc for 2017-18 and 2018-19, respectively, “despite an increase in macroeconomic imbalances” in the last financial year.
In its Pakistan Development Update, a biannual publication shedding light on the state of the economy and its future prospects, the global lender said the economic growth rate projection assumes that oil prices would increase slightly and that “political and security risks will be managed”.
Speaking at the official launch of the report on Thursday, llango Patchamuthu, the World Bank’s country director, said: “Pakistan will need to continue with economic reforms and pursue policies that make the country compete better in global markets.”
The bank believes that aggregate consumption, one of the key determinants of GDP, will grow because of a marginal recovery in remittances and higher government expenditure due to the election cycle.
Country director says Pakistan will need to continue with economic reforms
It expects that the services sector will grow 5.8pc in 2017-18 against 6pc in the preceding year due to healthy contribution from the sub-sectors of wholesale and retail trade and transport, storage and communications.
The industrial sector is likely to post a growth of 7pc against 5pc in 2016-17, thanks to improved power supplies and the China-Pakistan Economic Corridor (CPEC). The bank estimates that the agriculture sector will expand 2.9pc in 2017-18 against 3.5pc a year ago.
Pakistan’s current account balance is already under pressure and the World Bank believes the imbalance can become unsustainable “in the absence of timely corrective policy measures”. It projects that the current account deficit will be 4pc of GDP in 2017-18 against 4.1pc in the last fiscal year.
The current account deficit jumped 112pc year-on-year in the first quarter of the current fiscal year to $3.5 billion. Although the bank anticipates a rise in foreign direct investment in view of the CPEC, it notes that capital and financial flows will not fully finance the current account deficit, resulting in a drawdown of foreign exchange reserves.
The fiscal deficit is expected to widen in the election year amidst a slower increase in tax revenues, while inflation will likely reach 6pc in 2017-18, the World Bank says.
Remittances from the Gulf countries amounted to 62.6pc of total inflows in 2016-17. But growth in remittances would be subdued going forward, the bank said, as Gulf nations make gradual economic recovery.
The World Bank also called for increased rupee flexibility in order to help narrow the trade deficit. The gap between imports and exports of goods widened 37.1pc year-on-year to $7.2bn in July-September.
“Policymakers are usually concerned with the short-term adjustment costs of a weaker currency,” it said, noting that the currency depreciation would lead to “a moderate increase” in inflation and a “manageable increase” in debt financing costs.
“Higher inflation could affect consumption negatively, but the overall impact of a moderate depreciation on growth is likely to be positive,” it said.
The country’s ability to withstand external shocks would be compromised with declining reserves and elevated debt rations, the World Bank said, noting that short-term measures to preserve stability must be combined with longer-term structural reforms.
Published in Dawn, November 10th, 2017