ISLAMABAD, July 9: The Asian Development Bank (ADB) has said the political situation, current account deficit and debt management are potential risks for Pakistan and strong efforts were needed against the hazards.

In an overview of Pakistan’s public debt scenario, the bank said the country had significantly improved its economic performance and the debt situation had also eased but “strong efforts must be made to guard against potential risks”.

First, the improved debt indicators in Pakistan are closely linked with favourable external conditions. To sustain sound economic performance over the long term, “Pakistan must maintain political and economic stability”.

The bank called for faster economic reforms for investors’ confidence, saying sound policy environment that attracts sustained foreign direct investment (FDI) inflow is particularly important.

Second, coupled with strong capital inflow, the current account deficit has increased since 2005 and in fiscal 2006 more than tripled as import growth outstripped export growth because of higher oil prices and strong domestic demand.

It said the current account deficit per se is not necessarily a problem but increased current account deficit “raises concerns about the sustainability of financing large deficits” if the capital inflow is not significantly contributing the increased productive capacity and efficiency of a country.

Third, the large inflow of official assistance and workers’ remittance also poses the risk of Dutch Disease in that high capital inflow can lead to real exchange appreciation, rendering domestic tradable sectors, especially the manufacturing sectors, less competitive.

The utilisation of foreign aid thus must be geared towards spending on increased productivity and to provide a conducive environment for private sector development while avoiding the fostering of a bloated public sector.

The bank appreciated improved debt situation and attributed this to more favourable external conditions for Pakistan since September 2001. “While it has helped the country to achieve a significant improvement in debt indicators in the short run, it also exposes Pakistan to risks relating to the sustainability of both economic performance and debt management”.

In order to sustain and build on its existing achievements, Pakistan needs to deepen its structural reforms to improve the domestic investment environment, external competitiveness, sustain macroeconomic stability and maintain political stability, it said.

The ADB said debt management should take advantage of favourable economic conditions to strengthen the technical and institutional capacity in managing public debt.

It said the recent economic development and developments in external debt show that Pakistan is at a crossroad.

The strong economic performance, including the improvement of the public debt situation over the past few years, if sustained, can put Pakistan on a sustained growth path. “But there are real challenges and risks that need to be managed carefully. Maintaining political stability, sound macroeconomic management and structural reforms is the key for Pakistan to move forward,” the ADB concluded.