ISLAMABAD: Pakistan’s Gross Domestic Product (GDP) growth will accelerate to 4.5 in the current fiscal year and to 4.8 percent in FY2016/17, supported by strong services growth and a slight improvement in the industry sector, says World Bank’s new report, “Pakistan Development Update”, launched on Wednesday at the Quaid-i-Azam University in Islamabad.
The report discusses the important improvements of the external sector in Pakistan over the past few years. The foreign exchange reserves have increased from precariously low levels to appropriate level given the size of Pakistan’s imports. The current account deficit narrowed to US$2.6 billion in FY2014/15 compared to US$3.1 billion in the previous year, a result of record high remittances in the order of US$18.7 billion. External financial inflows continued strong, although lower than in the previous year. As a result, the balance of payments was positive for the second year in a row.
“There is an improvement in Pakistan’s overall economic environment. With macroeconomic stability largely restored, Pakistan can focus now on boosting development outcomes, which are not where one would expect, given the country’s income level”, says Patchamuthu Illangovan, World Bank Country Director for Pakistan. “To improve the country’s competitiveness, it is extremely important that the next phase of reforms is implemented and that Pakistan increases both public and private investment levels, which are among the lowest in the world.”
Several factors are contributing to low investment levels. Constrained fiscal space limits the government’s ability to make the necessary complementary public investments. A weak investment climate also affects private investment negatively. Another reason for the very low investment levels has to do with the low domestic savings rate in Pakistan at below 10 percent of GDP, which compares unfavourably with an average of around 25 percent in South Asia. Limited access to financial markets, high dependency ratio and low returns on financial instruments all contribute to this low rate of savings.
“Low domestic savings do not support higher investment levels”, says Enrique Blanco, Lead Country Economist. “The Government cannot make the required and complementary public investments, partly due to low revenue levels. The Government has embarked on ambitious program to improve tax policy and simplify tax administration, with the ultimate aim of increasing tax collection. There have been some improvements over the past few years – but results so far are not as expected and renewed efforts will be needed to address Pakistan’s very low revenue levels.”
This low saving-low investment trap has reduced Pakistan’s growth potential. The report also discusses the importance of increasing efforts to attract more Foreign Direct Investment from the current low levels of 0.3 percent of GDP, by improving the overall business climate and address regulatory weaknesses at the sectoral level that may be affecting the country’s ability to attract investment. The government is implementing a number of reforms to improve the country’s competitiveness. These include efforts to revive the privatization process, which will increase efficiency in management and improve service delivery, to improve access to and the quality of electricity, to promote financial inclusion and to simplify the trade regime and make it more transparent.