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Pakistan recovering from sharp slowdown in GDP growth: World Bank report
RECORDER REPORT
FAISALABAD (June 08 2010): World Bank has observed that the prospects for growth recovery of Pakistan are 3 percent in 2010-11 and rising to around 5 percent in the medium run. However, risks to the economic outlook are global recovery, an uncertain inflation outlook, weak fiscal revenue generation, continuing power shortages, and an uncertain political and security situation.
In "South Asia Economic Update 2010", released on Monday, WB report pointed out that Pakistan is recovering from the sharp slowdown in GDP growth in 2008-09. Concurrent with the global slowdown, reduction in domestic demand pushed GDP growth down to 2 percent in 2008-09, compared to an average of 6.6 percent in the preceding five years. The slow growth persisted throughout much of the first half of the current year. Although production of major crops is likely to fall, growth could edge up to 3 percent during 2009-10, helped by a revival in manufacturing and services, WB report mentioned.
WB report stated that the agriculture, which contributes a fifth of GDP, is likely to undershoot its targeted growth of 3.8 percent in 2009-10. Estimates of the kharif season indicate declines in the production of rice, sugarcane, maize, and wheat, which are likely to offset the rebound in cotton production. The large-scale manufacturing sector resumed growth in the past seven months to 2.4 percent, ending the 5.4 percent contraction of the previous year. Strong growth in automobiles, electronics, leather, and pharmaceuticals is leading growth in the sector supported by bank credit growth. Sustainability of growth momentum is conditional on domestic security, availability of energy inputs, credit market developments, and the pace of recovery in the advanced countries, report added. The service sector, WB report mentioned that the main contributor to overall growth in the last three years, is likely to pick up during 2009-10, benefiting from the revival in the manufacturing sector. Proximate indicators of service-sector growth show good performance in the finance and insurance, transport, storage, and communication sub-sectors.
WB report stated that the defence sector is expected to grow, in response to higher defence spending in conflict areas. WB report said that the Commercial Bank lending to the private sector has revived modestly, but the outlook is uncertain, as the market rate is starting to rise. The accumulation of non-performing loans has been slowing since March 2009, and bank deposits have grown strongly since September.
These improvements in the balance sheet of the commercial banks have facilitated 4 percent growth in bank lending to the private sector in the first eight months of the year. The spread between the Karachi Interbank Offer Rate and the policy rate has narrowed substantially, as the market is anticipating inflationary pressure from an uncertain fiscal position. After falling earlier, inflation has been on the rise since October 2009, with a high likelihood that it might exceed the 11 percent target for 2009-10, WB observed.
A drop in cereal production, WB report said that the rise in international commodity prices, the increase in the prices of electricity and gas, and local supply disruptions are likely to push the headline inflation higher. Core inflation has also been on the rise. The external account has shown improvement in the first eight months of 2009-10. The current account deficit narrowed sharply to $2.6 billion, down from US $8 billion in the same period last year, on the back of a pull-back in imports and 18 percent growth in worker remittance inflows. Net capital inflows remained larger than the current account deficit, helping to build reserves, WB report added.
According to WB report, Foreign Reserves of the State Bank of Pakistan at the end of March 2010 reached $11.1 (three months of import equivalent). Fiscal performance remains weak and continues to impose significant risks to economic stability. The 2009-10 fiscal deficit target has already been revised upward from 4.6 to 5.1 percent of GDP, but even the revised target is subject to risks. The fiscal deficit during the first half of 2009-10 was already 2.7 percent of GDP, and seasonality in revenues and expenditures implies a higher fiscal deficit in the second half of the fiscal year, report added.
WB report highlighted that the Federal tax collection has continued to under perform. To stay within the target, the authorities have decided to cut federal development spending by 30 percent. However, in parallel, electricity subsidies are projected to substantially overrun budgeted targets, and spending on security is expected to increase. Stepping up domestic revenue mobilisation is urgent, and the government is planning to introduce VAT, which will cover both goods and services, to increase revenues and broaden the tax base. Weak revenue mobilisation has been a challenge. Revenue mobilisation has suffered from an inefficient tax administration, a narrow tax base, a skewed tax structure, and a complex and nontransparent tax system, WB report added.
WB report mentioned that the Labour-intensive manufactured export sectors such as ready-made garments and textiles continued to play important roles in South Asia. They gained market shares (from the dismantling of the Multi-Fiber Agreement) and attracted buyers at both low (Bangladesh) and high (Sri Lanka) ends, as did other sectors, such as leather, gems and jewellery, carpets, and frozen foods. Bigger gains came from modern services-especially telecommunications, information technology (IT), tourism, transport, retail, and finance. Mobile telephony achieved rapid penetration and attracted large investments. Information technology and outsourcing grew rapidly in India and was spreading to Bangladesh, Pakistan, and Sri Lanka. Modern tourism grew in Bhutan, Maldives, Nepal , and Sri Lanka. According to WB report, South Asia's rebound since March 2009 has been strong, and is comparable to that in East Asia. South Asia is poised to grow by about 7 percent in 2010 and nearly 8 percent in 2011, thanks to the strong recovery in India, good performance in Bangladesh, post-conflict bounce in Sri Lanka, recovery in Pakistan , and turnarounds in other countries, including Afghanistan, Bhutan and Maldives .
Some significant risks are ahead in the global environment-slowing worker remittances and exports in a still hesitant and uncertain global recovery (which recent events in Europe have highlighted), volatile commodity prices, and continuing volatility in global capital flows.
WB report pointed out that the South Asia 's particular strengths and forms of global integration-not the lack of it-was a key reason that allowed greater resilience. The view that South Asia is relatively less integrated with the outside world, and that this helped protect it from the global recession, is outdated. Over the past 15 years the region has become much more open-and it appears that the form of openness it has chosen has provided resilience in the face of recent shocks.
Remittance inflows proved surprisingly resilient, as opposed to trends elsewhere, as workers from South Asia kept remitting earnings and savings from abroad even as they faced job losses and downturns in main migration centers. Exports proved relatively resilient, especially given the types of specialisation such as in the IT services sector (India), and in the garment and textile sectors (Bangladesh and Sri Lanka) where the region maintained competitiveness.
Foreign direct investment flows proved more buoyant and resilient than in other parts of the world. WB report stated that the managing the immediate recovery - create fiscal space, contain inflation, and boost agriculture. As South Asia's recovery gathers momentum, an immediate challenge is to create fiscal space and contain rising inflationary pressures, while ensuring that the exit from fiscal and monetary stimulus is in tune with the recovery of private demand. South Asia stands out compared to all other developing regions in terms of high levels of public debt and deficits (similar to levels in highly indebted developed countries). Greater fiscal space is needed to deal with unexpected future shocks, not crowd out the private sector, and permit governments to finance crucial public investment.
Managing inflationary pressures will also benefit from gradually tighter fiscal and monetary demand management to contain core nonfood inflation which has risen to a relatively high level of 7-10 percent, surpassing the pre-crisis average of 4-6 percent. Food prices have been rising especially sharply in recent months, because of poor weather in India compounded by delayed adjustment to higher global prices; they should moderate in the near-term, but a renewed focus on agriculture is also vital, especially given the persistently high rural populations and poverty. Sustaining inclusive and faster growth-new drivers of growth.
The challenge now is to also make this regional recovery more durable, inclusive and sustained, looking not to just cement its past successes, but to future drivers. The world that the region is facing after this crisis is different-with slowing growth in high income countries and faster growth in emerging markets-offering both opportunities and challenges. The model that has served the region well in the past, the growth of increasingly sophisticated service sectors, should continue to serve it well. But it will be useful to add to that in order to create more jobs and help realise the demographic potential of the region, report concluded.
Business Recorder [Pakistan's First Financial Daily]
Copyright Business Recorder, 2010
RECORDER REPORT
FAISALABAD (June 08 2010): World Bank has observed that the prospects for growth recovery of Pakistan are 3 percent in 2010-11 and rising to around 5 percent in the medium run. However, risks to the economic outlook are global recovery, an uncertain inflation outlook, weak fiscal revenue generation, continuing power shortages, and an uncertain political and security situation.
In "South Asia Economic Update 2010", released on Monday, WB report pointed out that Pakistan is recovering from the sharp slowdown in GDP growth in 2008-09. Concurrent with the global slowdown, reduction in domestic demand pushed GDP growth down to 2 percent in 2008-09, compared to an average of 6.6 percent in the preceding five years. The slow growth persisted throughout much of the first half of the current year. Although production of major crops is likely to fall, growth could edge up to 3 percent during 2009-10, helped by a revival in manufacturing and services, WB report mentioned.
WB report stated that the agriculture, which contributes a fifth of GDP, is likely to undershoot its targeted growth of 3.8 percent in 2009-10. Estimates of the kharif season indicate declines in the production of rice, sugarcane, maize, and wheat, which are likely to offset the rebound in cotton production. The large-scale manufacturing sector resumed growth in the past seven months to 2.4 percent, ending the 5.4 percent contraction of the previous year. Strong growth in automobiles, electronics, leather, and pharmaceuticals is leading growth in the sector supported by bank credit growth. Sustainability of growth momentum is conditional on domestic security, availability of energy inputs, credit market developments, and the pace of recovery in the advanced countries, report added. The service sector, WB report mentioned that the main contributor to overall growth in the last three years, is likely to pick up during 2009-10, benefiting from the revival in the manufacturing sector. Proximate indicators of service-sector growth show good performance in the finance and insurance, transport, storage, and communication sub-sectors.
WB report stated that the defence sector is expected to grow, in response to higher defence spending in conflict areas. WB report said that the Commercial Bank lending to the private sector has revived modestly, but the outlook is uncertain, as the market rate is starting to rise. The accumulation of non-performing loans has been slowing since March 2009, and bank deposits have grown strongly since September.
These improvements in the balance sheet of the commercial banks have facilitated 4 percent growth in bank lending to the private sector in the first eight months of the year. The spread between the Karachi Interbank Offer Rate and the policy rate has narrowed substantially, as the market is anticipating inflationary pressure from an uncertain fiscal position. After falling earlier, inflation has been on the rise since October 2009, with a high likelihood that it might exceed the 11 percent target for 2009-10, WB observed.
A drop in cereal production, WB report said that the rise in international commodity prices, the increase in the prices of electricity and gas, and local supply disruptions are likely to push the headline inflation higher. Core inflation has also been on the rise. The external account has shown improvement in the first eight months of 2009-10. The current account deficit narrowed sharply to $2.6 billion, down from US $8 billion in the same period last year, on the back of a pull-back in imports and 18 percent growth in worker remittance inflows. Net capital inflows remained larger than the current account deficit, helping to build reserves, WB report added.
According to WB report, Foreign Reserves of the State Bank of Pakistan at the end of March 2010 reached $11.1 (three months of import equivalent). Fiscal performance remains weak and continues to impose significant risks to economic stability. The 2009-10 fiscal deficit target has already been revised upward from 4.6 to 5.1 percent of GDP, but even the revised target is subject to risks. The fiscal deficit during the first half of 2009-10 was already 2.7 percent of GDP, and seasonality in revenues and expenditures implies a higher fiscal deficit in the second half of the fiscal year, report added.
WB report highlighted that the Federal tax collection has continued to under perform. To stay within the target, the authorities have decided to cut federal development spending by 30 percent. However, in parallel, electricity subsidies are projected to substantially overrun budgeted targets, and spending on security is expected to increase. Stepping up domestic revenue mobilisation is urgent, and the government is planning to introduce VAT, which will cover both goods and services, to increase revenues and broaden the tax base. Weak revenue mobilisation has been a challenge. Revenue mobilisation has suffered from an inefficient tax administration, a narrow tax base, a skewed tax structure, and a complex and nontransparent tax system, WB report added.
WB report mentioned that the Labour-intensive manufactured export sectors such as ready-made garments and textiles continued to play important roles in South Asia. They gained market shares (from the dismantling of the Multi-Fiber Agreement) and attracted buyers at both low (Bangladesh) and high (Sri Lanka) ends, as did other sectors, such as leather, gems and jewellery, carpets, and frozen foods. Bigger gains came from modern services-especially telecommunications, information technology (IT), tourism, transport, retail, and finance. Mobile telephony achieved rapid penetration and attracted large investments. Information technology and outsourcing grew rapidly in India and was spreading to Bangladesh, Pakistan, and Sri Lanka. Modern tourism grew in Bhutan, Maldives, Nepal , and Sri Lanka. According to WB report, South Asia's rebound since March 2009 has been strong, and is comparable to that in East Asia. South Asia is poised to grow by about 7 percent in 2010 and nearly 8 percent in 2011, thanks to the strong recovery in India, good performance in Bangladesh, post-conflict bounce in Sri Lanka, recovery in Pakistan , and turnarounds in other countries, including Afghanistan, Bhutan and Maldives .
Some significant risks are ahead in the global environment-slowing worker remittances and exports in a still hesitant and uncertain global recovery (which recent events in Europe have highlighted), volatile commodity prices, and continuing volatility in global capital flows.
WB report pointed out that the South Asia 's particular strengths and forms of global integration-not the lack of it-was a key reason that allowed greater resilience. The view that South Asia is relatively less integrated with the outside world, and that this helped protect it from the global recession, is outdated. Over the past 15 years the region has become much more open-and it appears that the form of openness it has chosen has provided resilience in the face of recent shocks.
Remittance inflows proved surprisingly resilient, as opposed to trends elsewhere, as workers from South Asia kept remitting earnings and savings from abroad even as they faced job losses and downturns in main migration centers. Exports proved relatively resilient, especially given the types of specialisation such as in the IT services sector (India), and in the garment and textile sectors (Bangladesh and Sri Lanka) where the region maintained competitiveness.
Foreign direct investment flows proved more buoyant and resilient than in other parts of the world. WB report stated that the managing the immediate recovery - create fiscal space, contain inflation, and boost agriculture. As South Asia's recovery gathers momentum, an immediate challenge is to create fiscal space and contain rising inflationary pressures, while ensuring that the exit from fiscal and monetary stimulus is in tune with the recovery of private demand. South Asia stands out compared to all other developing regions in terms of high levels of public debt and deficits (similar to levels in highly indebted developed countries). Greater fiscal space is needed to deal with unexpected future shocks, not crowd out the private sector, and permit governments to finance crucial public investment.
Managing inflationary pressures will also benefit from gradually tighter fiscal and monetary demand management to contain core nonfood inflation which has risen to a relatively high level of 7-10 percent, surpassing the pre-crisis average of 4-6 percent. Food prices have been rising especially sharply in recent months, because of poor weather in India compounded by delayed adjustment to higher global prices; they should moderate in the near-term, but a renewed focus on agriculture is also vital, especially given the persistently high rural populations and poverty. Sustaining inclusive and faster growth-new drivers of growth.
The challenge now is to also make this regional recovery more durable, inclusive and sustained, looking not to just cement its past successes, but to future drivers. The world that the region is facing after this crisis is different-with slowing growth in high income countries and faster growth in emerging markets-offering both opportunities and challenges. The model that has served the region well in the past, the growth of increasingly sophisticated service sectors, should continue to serve it well. But it will be useful to add to that in order to create more jobs and help realise the demographic potential of the region, report concluded.
Business Recorder [Pakistan's First Financial Daily]
Copyright Business Recorder, 2010
