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The World Bank (WB) has warned Pakistan of significant downside risks to the projected growth outlook, saying that slower progress in much-needed structural reforms could weaken growth prospects. The WB report, tilted "South Asia Economic Focus, Globalisation Backlash", stated that there are significant downside risks to the projected outlook with the upcoming national election in 2018 that may affect reform momentum and macroeconomic policy orientation.

Pakistan's growth prospects continue to improve and inflation remains contained. However, weak fiscal performance and pressures in external account pose a challenge. Efforts to reverse the current imbalances and continued implementation of structural reforms will be needed for sustaining and accelerating growth and improving welfare, maintained the WB report.

The economy is projected to grow by 5.2 percent in fiscal year 2017. On the demand side, the near-term growth outlook will primarily be supported by public and private consumption. Investment to GDP ratio will improve marginally due to CPEC and other public investment. On the supply side, impetus to growth is projected to come from services and the industrial sector. The services sector is expected to grow by 5.6 percent and the industrial sector is expected to grow by 6.1 percent in fiscal year 2017. After a weak performance in fiscal year 2016, the agriculture sector is expected to grow at 3.4 percent in fiscal year 2017.

The report states that Pakistan is vulnerable to any significant decline in remittance flows, particularly from oil-rich countries (around two thirds of all remittances), if oil prices remain depressed. But low oil prices will also improve the current account deficit and create an environment conducive for a reduction in energy subsidies.

The current account deficit is expected to widen from 1.2 percent of GDP in fiscal year 2016 to 2.2 percent in fiscal year 2017 and 2.4 percent by fiscal year 2019. The key contributor to this will be a widening of the trade deficit due to moderate growth in exports (due to weakening of exports competitiveness and global demand) and higher growth in imports due to increased economic activity.

According to the WB report official foreign exchange reserves are projected to decline to 3.2 months of imports by fiscal year 2019 due to larger current account deficit, and higher debt repayments (due to IMF repayments) in fiscal year 2018. The fiscal deficit is projected to be 4.8 percent in fiscal year 2017, 0.3 percent higher than the fiscal year 2016 deficit. This widening is primarily driven by slower increase in government tax revenues (both federal and provincial) coupled with decline in non-tax revenues. Inflation has already bottomed out. Projected increases in economic activity and an expected gradual increase in energy prices will push up domestic prices. Inflation is projected to increase from 2.9 percent in fiscal year 2016 to 5 percent in fiscal year 2017 and 7.0 percent in fiscal year 2019.

The WB report states that Large Scale Manufacturing (LSM) growth (year on year) remained at 3.9 percent during the first half of fiscal year 2017, supported by growth in automobiles, construction, food & beverages, pharmaceuticals, and fertiliser. The CPEC projects have supported construction activity, which is expected to stimulate industrial sector growth in the second half of fiscal year 2017. Headline inflation remained moderate during July-February fiscal year 2017 at 3.9 percent.

Exports contracted by 2.0 percent during July-February fiscal year 2017. Imports grew at 11.2 percent during the first eight months of fiscal year 2017. The trade deficit, therefore, widened by 26.9 percent during July-February fiscal year 2017. Remittances decreased by 2.5 percent during July-February fiscal year 2017 due to declining public investment in GCC economies.

FDI flows will strengthen due to the accelerated implementation of CPEC projects. Pakistan received FDI of $1.2 billion from July 2016 until February 2017. The Rupee remained stable against the US dollar in July-February 2017 as market expectations were kept in check due to a comfortable official reserves position.

Weaker revenue collection and strong growth in the expenditures has led to a widening of the deficit to 2.4 percent in the first half of fiscal year 2017, 0.7 percentage points higher than the same period of last year. Debt to GDP ratio stands high at 62.8 percent at the end of Q2- fiscal year 2017.

A stable PKR/US dollar nominal exchange rate has resulted in appreciation of Real Effective Exchange Rate (REER). Furthermore, lingering uncertainty about the course of US economic policy and the possibility of a protracted global economic weakness, especially in the Euro area due to Brexit, could negatively affect exports.



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