The World Bank (WB) has projected Pakistan GDP growth rate for the fiscal year 2014 at four percent to be driven by less loadshedding, resilient remittance flows, manufacturing export performance and a dynamic service sector. South Asia Chief Economist Martin Rama, while sharing key findings of the World Bank''s report "South Asia Economic Focus" in a video-conference media briefing, said Pakistan''s economy though still weak had begun to show signs of improvement.
According to the report, the banking system of the country has very limited exposure to external shocks and has shown resilience amidst domestic shocks, but may now be vulnerable to reverse shock transmissions from the Government of Pakistan. The government of Pakistan has been dealing with balance of payment and fiscal imbalances that have intensified in recent years. An economic slowdown, weak external inflows, low revenue collection and high subsidies to support an unsustainable energy mix have all contributed to a significantly deteriorating balance sheet. To manage these pressures, the government has been relying heavily on domestic sources of funding.
With debt levels of the government reaching unsustainable levels, and limited expansion of private sector credit, banks remain exposed to significant risk on government, which in turn is exposed to significant external account and fiscal shocks. Banks'' overexposure to government debt, the government''s vulnerable external account and fiscal positions, and the existence of a reverse shock transmission mechanism are proving to be a new source of systemic risk to the banking sector.
According to the report, three sources of risk appear worrisome. Pakistan imports more than it exports, the latter being constrained by low productivity and competitiveness, limited access to reliable energy, and cumbersome business regulations. Political events keep FDI and private investment low, which also affects foreign reserves. An uncertain political environment undermines investor confidence and depresses economic activity. The troubled domestic energy sector continues to endure a long-due complex inheritance on its circular debt which, contrary to the government''s plans, might affect the magnitude of fiscal adjustment. However, Pakistan''s Emerging Markets Bonds Index Plus (EMBI+) risk spread keeps declining from the high levels shown at the start of the new administration last year. Market confidence in the government''s program is bearing fruit, as the EMBI has almost halved from 1,011 basis points in March 2013 to around 468 basis points as of March 26, 2014. It further states that thus far, the impulse to growth stems mainly from industry and services, while agriculture is estimated to slightly miss its annual target. An improved industrial sector performance can be attributed to better energy availability and post-election investor confidence. Even with this uptick in local industry, better performance by the telecom sector, and improved volumes of international wholesale and retail trade, the services sector appears to have stolen the limelight.
Estimates for first half of fiscal year 2014 shows growth improved in wholesale and retail trade, finance, and insurance. Acceleration in growth of large-scale manufacturing came from a strong performance of agro-based industries, iron and steel, construction, and external demand-driven cotton yarn and fabrics-based textiles. Agriculture appears slightly below target because of underperformance of cotton, major Kharif crop, due to shortage of water availability at the time of sowing. On the demand side, growth continues to be driven by private consumption. Credit to the private sector has started to rebound and had posted nominal growth of 4.6 percent, y-o-y, at mid-March 2014.
Pakistan is on track to meet fiscal deficit target of 5.8 percent of GDP in fiscal year 2014. FBR collection is slightly below target but improving. On the expenditure side, energy-related subsidies have been reduced with tariff adjustments. However, though the government reduced the stock of circular debt, which led to reduced load-shedding in the first months of the year, the circular debt is re-emerging. Public investment - constrained by lack of fiscal space and any commitment to reduce the fiscal deficit-remains contained. Revenue collection is expected to be close to the revised target of Rs 2,345 billion.
Current expenditure of the federal government is projected to decline. The current account deficit is projected to approach a modest one percent of GDP by end-fiscal year 2014, and remain so during the projection period. Higher financial inflows are expected to be attracted by lower country risk, privatisation''s, new trade relations with neighbours and the opening of special economic zones and multilateral flows. Official foreign exchange reserves are expected to build from $6.0 billion by the end of FY13 to about $16 billion by end- fiscal year 2016. Recent alleviation in reserves has come from unexpected inflows received bilaterally under the umbrella of the Pakistan Development Fund, and further easing is expected to come from CSF monies, 3G and 4G license as well as issuance of Eurobonds.
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