The Bank report "South Asia Economic Focus" has stated that political uncertainty and potential turmoil continue to be risk factors in Pakistan. A key risk is the repetition of the political events of the first half of fiscal year 2014-15, which could keep FDI flows and private investment low, affect foreign reserves, slow down the government's privatisation programme and ultimately undermine growth prospects.
The recurrent expenditures of the federal government increased by 4.8 percent in fiscal year 2014-15, because of additional defense-related expenditures and federal grants to state-owned enterprises.
It further states that inflation is moderating and average CPI inflation remained in a single digit, hovering around 6.8% by January 2015 and expected to fall to about 5.5% by end of fiscal year 2015. The Bank has projected GDP growth of 4.4 percent for the current fiscal year.
It further states that in Pakistan, a gradual recovery to around 4.6 percent growth by end of fiscal year 2015-16 will be aided by low inflation, fiscal consolidation and the rebuilding of the external position. But its success will remain contingent on tackling key growth constraints: power loadshedding, a cumbersome business environment, and low access to finance. Helped by cheap international oil prices and steady implementation of its reforms program, the economy has showed resilience.
According to the report, negative export growth was mainly driven by deteriorated exports of textile, food items (wheat and tobacco), petroleum products, as well as chemical and pharmaceutical goods. Pakistan also saw pressures on its rupee ease, with the real effective exchange rate appreciating over the second half of 2014, helped by solid capital inflows and decreasing inflation. Development spending of the consolidated government registered a marginal increase of 1.5 percent only. However, fiscal space was created as subsidies registered a decline for the third consecutive year, from 0.7 percent of GDP in the first half of FY 2014 to 0.4 percent of GDP during first half of FY 2015.
The decline in oil prices was passed on to domestic prices to a very large extent in Pakistan. The pass-through was around 54 percent in case of LPG and kerosene, and 56 percent and 47 percent in case of gasoline and diese,l respectively. Pakistan has mildly started to benefit from low oil prices reflected by its import bill contained at $626 million per month as of February 2015, but this effect continues to be offset by a fall in the export values of agriculture commodities and lower trade related revenues, maintained the report.
The report further states that falling oil prices have reduced input costs for electricity generation enabling tariffs to be adjusted downwards. However, a gap of about Rs 2/kWh remains and the sector continues to suffer acute liquidity shortages. As a result, the circular debt has started to re-emerge and currently stands at an estimated Rs 245 billion, or one percent of fiscal year 2013-14 GDP. The power producers have been unable to buy and/or produce adequate fuel to generate electricity that causes up to 5,000 MW of capacity to lie idle and contributed to several power shortages. Amid lower oil prices, electricity pricing reform has regained momentum. The government intends to adjust electricity tariffs and bring subsidies for electricity down to 0.7percent of GDP in fiscal year 2014-2015.
According to the report, tax collection improved, but it remained slightly below target due to legal challenges and lower-than-expected revenues from taxes on oil imports. The budget envisaged a 24 percent growth in its tax collection over last year; however, floods and major political turbulence during the first half of fiscal year 2014-15 created significant headwinds and FBR's tax collection during FY 2014-15 in the first half grew only by 13.6 percent. Non-tax revenues during the first half of FY2014/15 stood at Rs 388 billion compared to Rs 493 billion during the same period last year.
Revenues are projected to increase from 14.3% of GDP in FY14 to 15.4% in FY17 as a result a sound tax reform strategy. On the expenditure side, energy-related budgeted subsidies keep being reduced with power tariff adjustments, favoured by an oil price windfall. The overall fiscal deficit will therefore decline from 5.5% of GDP in FY14 to 4.2% of GDP in FY17 and decline marginally thereafter. Official foreign exchange reserves are expected to keep building from $9.2 billion by the end of FY14, and projected to reach $15.4 billion (about 3.5 months of import coverage) by end FY15. External current account deficit remains modest, at around 0.8% of GDP during the first half FY15 and on track to achieve about 1.2% of GDP by end-FY15.
Pakistan's Emerging Markets Bonds Index Plus (EMBI+) risk spread keeps declining from the high levels 1,011 basis points in March 2013 to around 525 basis points as of December 31, 2015, maintained the report.