World Bank sees gradual increase in inflation rate

The World Bank (WB) is expecting gradual increase in inflation rate for Pakistan which continues in single-digits as the base effect diminishes, domestic energy prices increases, and aggregate demand grows. Releasing its twice-a-year Pakistan Development Update, the World Bank noted that much of the country''s economic growth was underpinned by external influences such as low oil prices and strong remittances while private and public investments continue to remain low.
It states that CPI inflation (y-o-y) has started to rise since October 2015, which has moderated the pace of monetary easing in fiscal year 2016 relative to last year. Going forward, inflation is expected to steadily rise as the base effect diminishes, domestic energy prices increase, and aggregate demand grows. This may lead to a gradual monetary tightening.
As the election year approaches in 2018, the government may find it difficult to implement difficult decisions, particularly on taxation and energy. This, combined with pre-election spending pressures, poses a risk to prudent fiscal policy. Pakistan''s success in poverty reduction is likely to falter if it is driven by remittances or windfalls generated by low commodity prices. Sustainable poverty reduction, including the government''s focus on inclusion, requires investment and job creation within the economy combined with efforts to substantially raise agricultural productivity, maintained in the Outlook.
It further states that from fiscal year 2016 to fiscal year 2019 is for moderately higher economic growth. GDP growth is projected to accelerate from 4.2 percent in fiscal year 2015 to 4.5 percent in fiscal year 2016 and 5.1 percent by fiscal year 2018. Growth acceleration will be gradual, driven by strengthening investment flows and productivity gains in services, large scale manufacturing and construction. These sectors should benefit from decreased power load-shedding and improvements in the business climate, with construction also profiting from the infrastructure and energy projects associated with the CPEC.
The report maintains that of all the countries in South Asia, Pakistan is most exposed to China. Almost 10 percent of Pakistan''s exports go to China, primarily raw materials like cotton yarn, chromium ores, raw hides, marble and articles of copper. The slowdown in China is already impacting exports which shrank by 12.5 percent in the first eight months of FY16. Further slowdown in China could lead to a further decline. Pakistan expects to receive significant FDI from China under CPEC at a time when the Chinese economy is slowing down. The CPEC, if completed, could be a game changer for Pakistan, but is currently facing high political risks.
Pakistan remains one of the largest remittances destinations in the world, and remittances are the principal source of financing the trade deficit. More than 60 percent of Pakistan''s remittances originate from GCC countries, and this is a source of concern given oil price projections. Pakistan will need to invest more to accelerate growth. Pakistan is investing only 15 percent of GDP, one of the lowest investment rates in the world, and about one half the South Asia average.
"Pakistan has made great progress in restoring macroeconomic stability but much more needs to be done to put Pakistan on a solid, economic growth footing," said Illango Patchamuthu, World Bank Country Director for Pakistan. "Persistent, steady progress on the structural reform agenda will be necessary if Pakistan is to accelerate its growth recovery and lift millions more out of poverty."
The latest Pakistan Development Update sets out recent developments across the economy and identifies risks and next steps facing Pakistan''s near-term future before focusing in on a handful of key development challenges. The report identifies services and large-scale manufacturing as the key supply-side drivers of growth. Services are expected to grow over 5 percent in fiscal year 2016 while large-scale manufacturing, benefiting from low global commodity prices, is expected to grow between 4 and 4.5 percent. On the demand side, consumption is driving growth, fuelled by rising remittances and a loose monetary stance.
The report is optimistic about recent progress in fiscal consolidation, highlighting a 20 percent growth in the revenues of Federal Board of Revenue for the first eight months of fiscal year 2016. "Fiscal consolidation is one of the most significant reform challenges facing Pakistan today", said Enrique Blanco Armas, the World Bank Lead Economist for Pakistan. "The federal government has kept a tight rein on recurrent expenditure, while continuing to invest in Public Sector Development Program expenditure, a very positive development."
Workers'' remittances and lower oil prices contributed most to the accumulation in foreign reserves, according to the report. Remittances of $9.7 billion in the first half of fiscal year 2016 more than compensated for the trade deficit, and oil prices delivered a 9.1 percent fall in the import bill.
Exports fell by 11.1 percent in the first half of fiscal year 2016 as a result of softer global demand and domestic bottlenecks. Port charges in Karachi, for example, are nine times higher than those in Dubai and Singapore. Shipping container dwelling times are three times longer than in East Asia. Exporters who want to participate in global supply chains are hamstrung by these constraints.