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Pakistan must make rapid adjustments and reforms to avert an economic crisis as it suffers the impact of high international prices for petroleum and food such as wheat, the World Bank said on Thursday. Pakistan was likely to miss this year's targets for its fiscal deficit, inflation, current account deficit and foreign exchange reserves, the bank said.
"There is not yet a crisis, but the economic picture for Pakistan is not good," said World Bank Vice President Praful Patel at the end of a three-day visit. The news comes as a new coalition government is set to take power.
Patel said Pakistan had seen robust economic growth over the past few years and foreign direct investment and remittances had maintained pace and the stock market had posted gains.
But growth could be maintained only if the country adjusted to the new global reality, which included high prices for oil and food such as wheat. "Any adjustment will be painful ... there must be an appropriate safety net for the poor," Patel said in a statement. Patel held talks with leaders of the new government and its economic advisers and said they had asked for World Bank support.
Analysts say widening fiscal and current account deficits and rising inflation are the major economic problems facing the new government. Standard & Poor's Ratings Services said on Tuesday it was maintaining its negative outlook on Pakistan, and warned that despite a more positive political outlook, Pakistan's ratings could be lowered if the new rulers proved too distracted to deal with problems.
Pakistan's current account deficit widened to $8.421 billion in the first eight months of the 2007/08 fiscal year to June, compared with $5.857 billion in the same period last year.
The fiscal deficit for the first half of the financial year, to the end of December, was 3.6 percent of gross domestic product compared with 1.9 percent in the same period the previous year. The consumer price index, a key indicator of inflation, rose 11.25 percent in February from a year ago. "Pakistan will need the international community's support over the coming months," Patel said.
"If action is not taken, the economy will start to falter but with the right policies and strong support from multilateral and bilateral partners, we believe the high growth and poverty reduction path can be maintained."
Despite the looming problems, Pakistan's main stocks index, one of the best performing in Asia last year, has gained 8.5 percent since the beginning of the year and 6.4 percent since a February 18 general election.

Copyright Reuters, 2008

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