ISLAMABAD, March 27: The growing current account deficit, continuing high inflation, and the emerging power and gas shortages are potential risks to the country's medium-term economic prospects, warns the Asian Development Bank (ADB).

Any deterioration in the security environment would be another danger. In addition, the ending in 2008 of People’s Republic of China’s specific safeguards imposed by the US and EU against textile and clothing imports could further weaken Pakistan's textile export prospects, maintains the Asian Development Bank Outlook 2007, issued here on Tuesday.

It says that still important structural challenges remain and have to be tackled promptly to sustain the present growth trend. Despite healthier investment, it notes that the investment-to-GDP ratio is still low in comparison to countries that have experienced sustained strong growth.

Similarly, gross savings as a share of the GDP needs to pick up substantially. In recent years, the demand-driven growth and negative real interest rates on bank deposits have contributed to low savings. Another issue is the narrow industrial base, which is linked to the lack of a diversified export base, which in turn must cope with rising international competition, the outlook notes

It says human capital development remains a major structural challenge. The government is tackling these structural challenges over the medium term by committing to reform, by strengthening the enabling environment for investment, and by prioritising resource allocation for infrastructure development and the social sectors.

About the future economic prospects, the ADP says the prognosis for 2006-07 and 2007-08 is based on assumptions that the authorities will continue, or perhaps strengthen economic reforms of recent years, and they will press on with relieving the macroeconomic stresses that have emerged in the last couple of years.

It is assumed that the central bank will continue its tight monetary policy and pursue a flexible exchange rate policy. Globally, economic growth in the United States and the European Union, the country's two largest trading partners, is assumed to slow somewhat, as is the growth of world trade volume, the report observes.

It says the sharp rise in investment last year and moderation in oil prices are expected to boost growth in 2006-07. However, shortages of natural gas and suspension of its supply to a number of industrial units to meet the rising demand for household consumption (because of exceptionally cold weather) will likely depress industrial growth which, along with the ongoing slowdown in exports, will dampen the expansion.

The report says that agriculture and manufacturing sectors have improved in the first half of 2006-07 and services appear to be growing robustly, but somewhat less quickly than last year’s.

With developments to date, the economy is projected to grow by 6.8 per cent in 2006-07, a solid expansion, but essentially unchanged from a year ago. In agriculture, production of the major summer crops in 2006-07 has shown improvement. The higher offtake of fertilizers and a substantial increase in production loans for agriculture, as well as greater availability of water, all augur well for winter crops.