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COUNTRY SNAPSHOT
Recent Economic and Sector Developments
Economic Overview Economic conditions improved during 2013/14, though they have weakened recently due in part to a succession of political events and floods. Progress last year was indeed significant, supported by a solid economic program. It included an International Monetary Fund (IMF) Extended Fund Facility (EFF) program and two World Bank Development Policy Credits to restructure the energy sector, foster private and financial sector developments and improve social protection and revenue mobilization. The risk of a balance of payment crisis was minimized with a significant strengthening of the reserve position, resulting mainly from strong remittances and significant foreign capital inflows that also brought stability in the foreign exchange market. As a result of the program, strong fiscal consolidation took place—with the fiscal deficit contained at around 5.5 percent of GDP — due to improved tax collection and high non-tax revenues, as well as restricted expenditures. Price stabilization followed with average inflation remaining in the single digits. Ensuing growth recovery went above a four percent rate for the first time in seven years—driven by dynamic manufacturing and service sectors supported by better energy availability and improved investors’ expectations. As a result, performance under the IMF program remained satisfactory, with the third review concluded on June 27
Increased remittances, capital and financial inflows supported reserves buildup. The capital and financial account registered a sizeable surplus of $7.07 billion in 2013/14 compared to only 0.8 billion in 2012/13. Official reserves increased to about two months of imports on June 30, 2014. Foreign inflows led to a slight appreciation of the real effective exchange rate.
A significant correction of a previously loose fiscal stance took place. The government brought the fiscal deficit down from 8.3 percent of GDP in 2012/13 to 5.5 percent of GDP in 2013/14. Tax revenue increased by almost one percent of GDP and expenditure was constrained to 1.3 percent of GDP.
Improvement in business confidence produced a strong recovery in private sector credit after five years of muted growth. The lower demand for commercial bank credit by the government due to a lower fiscal deficit provided necessary space for the private sector to borrow from the banking system.
Price stability at single digits was preserved. Better supply conditions, reduced external vulnerability and fiscal consolidation contributed to the softening of underlying inflationary pressures.
Growth recovery re-emerged. GDP growth rate was 4.1 percent in 2013/14, primarily driven by the services and manufacturing sectors. Industrial sector growth was based on a sharp turnaround in construction, electricity generation and gas distribution and better performance of large scale manufacturing (LSM) with growth of about four percent. However but agricultural growth was slower compared to the previous year. In addition, services contributed to about 60 percent of growth through relatively better performance in wholesale and retail trade, as well as transport, storage and communication.
Progress on the structural reform agenda was also promising. The government reduced power subsidies with the aim of gradually phasing them out by adjusting tariffs to approach the level of cost recovery. A technical and financial audit will identify the stock and flow of payables at all levels of the energy sector, and a roadmap to limit the accumulation of new arrears and reduce their stock has been designed. The government also completed capital market transactions by selling shares of United Bank Limited and Pakistan Petroleum Limited in June 2014, and it auctioned 3G telecoms licenses. Under a three-year program phasing out concessionary tax exemptions, the budget approved a package of revenue measures to expand the tax base, including the elimination of tax exemptions and higher income, sales and excise tax rates for special categories. The package also raises additional revenues equivalent to above one percent of GDP, initially reduces the number of statutory tariff categories, expands the scope and significantly increases the benefits of the Benazir Income Support Program (BISP) cash transfer initiative while introducing conditional cash transfers supporting school enrollment. For the first time in seven years, the government raised $2 billion by placing sovereign bonds in international debt markets – both a move to build reserves and a sign reflecting investors’ confidence toward the structural reforms
However, the political events following the mid-August long march and sit-in have affected the economy. The political volatility raised questions about how much the business-prone, investor-friendly image that Pakistan was carefully rebuilding has been tarnished, and how quickly reform momentum can be recovered. In the meantime, signs emerged of perceived deterioration of the economy. Growth may have slowed down in the first quarter due to the virtual paralysis of the government machinery. The international reserve position suffered small losses, and an accelerated rupee depreciation of 4.3 percent in less than a month forced the State Bank of Pakistan’s (SBP’s) intervention of about $375 million. On the expenditure side, the cost of additional security has been small – equivalent to 0.1 percent of GDP – and tax receipts grew at 25 percent despite a call for civil disobedience by the demonstrators. Investment decisions and visits by the presidents of China and Sri Lanka were postponed.
It remains to be determined how much the reform momentum of the past fiscal year will be affected by political unrest. More economic volatility and political resistance is predictable. A politically weaker government may water down certain structural reforms needed for growth acceleration and poverty reduction. In an early sign of the ongoing difficulties, and unlike the past three favorable and timely reviews of the IMF program, the fourth review initially scheduled for Board presentation by the end of September is delayed. At least three areas of reform may get delayed or modified: approval of power tariffs, the privatization agenda and reforms requiring legislative approval. Alternatively, the government may consider strengthening some areas of the program, such as inclusion and governance. Strengthening media communication efforts on the benefits of reforms may also help regain momentum.
Growth Performance
Pakistan’s economy is recovering. In its first year of reforms, the economy showed clear signs of improvements thanks to decisive early actions to address its serious macro-economic imbalances and launch structural changes. The program has been supported by an IMF Extended Fund Facility (EFF) program and two Bank Development Policy Credits to restructure the energy sector, foster private and financial sector developments and improve social protection and revenue mobilization. Preliminary end-fiscal year macro indicators were all positive. GDP growth rate reached 4.1 percent.
Growth is being led by the industrial and service sectors, as agricultural growth remained stagnant. An improved industrial sector performance can be attributed to better energy availability and post-election business confidence. The growth in the industrial sector was significantly broad-based, as there was a sharp turnaround in construction, electricity generation and gas distribution, while large-scale manufacturing (LSM) grew by 3.9 percent during 2013/14. Two sub-sectors – agro-based industries (food, beverages and tobacco), and textiles – accounted for the bulk of growth in the LSM sector. The services sector grew by 4.3 percent, a drop from the sectoral growth of 4.9 percent in 2012/13.
More in the Link
Pakistan - Country snapshot (English) | The World Bank
Recent Economic and Sector Developments
Economic Overview Economic conditions improved during 2013/14, though they have weakened recently due in part to a succession of political events and floods. Progress last year was indeed significant, supported by a solid economic program. It included an International Monetary Fund (IMF) Extended Fund Facility (EFF) program and two World Bank Development Policy Credits to restructure the energy sector, foster private and financial sector developments and improve social protection and revenue mobilization. The risk of a balance of payment crisis was minimized with a significant strengthening of the reserve position, resulting mainly from strong remittances and significant foreign capital inflows that also brought stability in the foreign exchange market. As a result of the program, strong fiscal consolidation took place—with the fiscal deficit contained at around 5.5 percent of GDP — due to improved tax collection and high non-tax revenues, as well as restricted expenditures. Price stabilization followed with average inflation remaining in the single digits. Ensuing growth recovery went above a four percent rate for the first time in seven years—driven by dynamic manufacturing and service sectors supported by better energy availability and improved investors’ expectations. As a result, performance under the IMF program remained satisfactory, with the third review concluded on June 27
Increased remittances, capital and financial inflows supported reserves buildup. The capital and financial account registered a sizeable surplus of $7.07 billion in 2013/14 compared to only 0.8 billion in 2012/13. Official reserves increased to about two months of imports on June 30, 2014. Foreign inflows led to a slight appreciation of the real effective exchange rate.
A significant correction of a previously loose fiscal stance took place. The government brought the fiscal deficit down from 8.3 percent of GDP in 2012/13 to 5.5 percent of GDP in 2013/14. Tax revenue increased by almost one percent of GDP and expenditure was constrained to 1.3 percent of GDP.
Improvement in business confidence produced a strong recovery in private sector credit after five years of muted growth. The lower demand for commercial bank credit by the government due to a lower fiscal deficit provided necessary space for the private sector to borrow from the banking system.
Price stability at single digits was preserved. Better supply conditions, reduced external vulnerability and fiscal consolidation contributed to the softening of underlying inflationary pressures.
Growth recovery re-emerged. GDP growth rate was 4.1 percent in 2013/14, primarily driven by the services and manufacturing sectors. Industrial sector growth was based on a sharp turnaround in construction, electricity generation and gas distribution and better performance of large scale manufacturing (LSM) with growth of about four percent. However but agricultural growth was slower compared to the previous year. In addition, services contributed to about 60 percent of growth through relatively better performance in wholesale and retail trade, as well as transport, storage and communication.
Progress on the structural reform agenda was also promising. The government reduced power subsidies with the aim of gradually phasing them out by adjusting tariffs to approach the level of cost recovery. A technical and financial audit will identify the stock and flow of payables at all levels of the energy sector, and a roadmap to limit the accumulation of new arrears and reduce their stock has been designed. The government also completed capital market transactions by selling shares of United Bank Limited and Pakistan Petroleum Limited in June 2014, and it auctioned 3G telecoms licenses. Under a three-year program phasing out concessionary tax exemptions, the budget approved a package of revenue measures to expand the tax base, including the elimination of tax exemptions and higher income, sales and excise tax rates for special categories. The package also raises additional revenues equivalent to above one percent of GDP, initially reduces the number of statutory tariff categories, expands the scope and significantly increases the benefits of the Benazir Income Support Program (BISP) cash transfer initiative while introducing conditional cash transfers supporting school enrollment. For the first time in seven years, the government raised $2 billion by placing sovereign bonds in international debt markets – both a move to build reserves and a sign reflecting investors’ confidence toward the structural reforms
However, the political events following the mid-August long march and sit-in have affected the economy. The political volatility raised questions about how much the business-prone, investor-friendly image that Pakistan was carefully rebuilding has been tarnished, and how quickly reform momentum can be recovered. In the meantime, signs emerged of perceived deterioration of the economy. Growth may have slowed down in the first quarter due to the virtual paralysis of the government machinery. The international reserve position suffered small losses, and an accelerated rupee depreciation of 4.3 percent in less than a month forced the State Bank of Pakistan’s (SBP’s) intervention of about $375 million. On the expenditure side, the cost of additional security has been small – equivalent to 0.1 percent of GDP – and tax receipts grew at 25 percent despite a call for civil disobedience by the demonstrators. Investment decisions and visits by the presidents of China and Sri Lanka were postponed.
It remains to be determined how much the reform momentum of the past fiscal year will be affected by political unrest. More economic volatility and political resistance is predictable. A politically weaker government may water down certain structural reforms needed for growth acceleration and poverty reduction. In an early sign of the ongoing difficulties, and unlike the past three favorable and timely reviews of the IMF program, the fourth review initially scheduled for Board presentation by the end of September is delayed. At least three areas of reform may get delayed or modified: approval of power tariffs, the privatization agenda and reforms requiring legislative approval. Alternatively, the government may consider strengthening some areas of the program, such as inclusion and governance. Strengthening media communication efforts on the benefits of reforms may also help regain momentum.
Growth Performance
Pakistan’s economy is recovering. In its first year of reforms, the economy showed clear signs of improvements thanks to decisive early actions to address its serious macro-economic imbalances and launch structural changes. The program has been supported by an IMF Extended Fund Facility (EFF) program and two Bank Development Policy Credits to restructure the energy sector, foster private and financial sector developments and improve social protection and revenue mobilization. Preliminary end-fiscal year macro indicators were all positive. GDP growth rate reached 4.1 percent.
Growth is being led by the industrial and service sectors, as agricultural growth remained stagnant. An improved industrial sector performance can be attributed to better energy availability and post-election business confidence. The growth in the industrial sector was significantly broad-based, as there was a sharp turnaround in construction, electricity generation and gas distribution, while large-scale manufacturing (LSM) grew by 3.9 percent during 2013/14. Two sub-sectors – agro-based industries (food, beverages and tobacco), and textiles – accounted for the bulk of growth in the LSM sector. The services sector grew by 4.3 percent, a drop from the sectoral growth of 4.9 percent in 2012/13.
More in the Link
Pakistan - Country snapshot (English) | The World Bank