Ousting of former prime Minister Nawaz Sharif has inflated political risks and causing policy uncertainty,as specified in latest report by the World Bank on South Asia,which said Pakistan’s growth slant continued to improve and stagflation remain contained.
The report titled “South Asia Economic Report, Fall 2017 – Growth Out of the Blue”, and released ahead of the annual World Bank and IMF meetings said that upcoming national election in 2018 might affect the reform momentum and macroeconomic policy.
“Slower progress in much-needed structural reforms would weaken growth prospects and discourage private investment,” the report said, which though noted that Pakistan’s growth outlook continued to improve but also pointed to growing fiscal and external imbalances which posed an immediate challenge to it.
“Efforts to reverse the current imbalances and continued implementation of structural reforms will be needed for sustaining and accelerating growth and improving welfare,” the report said.
It said that Pakistan’s GDP (gross domestic product) growth continued to increase and was 5.3 per cent in FY2017. After a weak performance in FY2016, the agricultural sector picked up during FY2017 and grew at 3.5 per cent due to better cotton, sugarcane, and maize crops.
The services sector, which accounts for approximately 60 per cent of the economy, grew 6.0 per cent in FY2017 surpassing the target of 5.7 per cent. On the demand side, growth was again dominated by domestic consumption, which accounted for an overwhelming 92 per cent of GDP in FY2017.
The report said that strong aggregate demand and improving business sentiments were evident in private sector credit growth of 18.2 per cent, expanding by 748 billion rupees in FY2017 compared to 46.5 billion rupees in FY2016.
“Low inflation and low interest rates also contributed to higher credit growth. An increase in foreign investment flows from China (to fund CPEC projects) has also contributed to growth,” it added.
However, the report said that Pakistan’s external account and international reserves came under stress at the end of FY2017 because of a high and widening current account deficit.
“The current account deficit for FY2017 has swelled to 4 per cent of GDP (USD 12.1 billion), compared to 1.7 per cent of GDP in FY2016. The key driver is a very large trade deficit, which swelled to $ 26.9 billion (8.9 per cent of GDP) due to declining exports and high import growth.”
“The outlook until FY2019 is for moderately higher growth. This outlook is contingent upon continued macroeconomic 2016 population as well as steady progress in implementing the main pillars of the Government’s medium-term reform program, which tackles key constraints to growth. The outlook assumes that oil prices will increase moderately but remain low,” the report said.
“The pressure on the current account is expected to persist as the trade deficit will remain elevated during FY2018 and FY2019,” the report said, adding, “This situation can potentially become unsustainable in absence of corrective policy measures. However, exports are expected to recover during FY2018 and FY2019 due to an easing of supply side factors.”
The report added that removal of Mr. Sharif from Premiership could serve as a serious blow back to Pakistan’s economic gains as the sharif family clinches to power despite openly clashing with the powerful army.