The World Bank’s optimism on Pakistan

It is surprising that World Bank's report shows no awareness of the devastating floods which hit Pakistan in September

The World Bank published a report titled “South Asia Economic Focus” on October 4, 2014. The report contains a review of the collective and individual economic performances of South Asian countries in 2013-14, as well as giving an outlook for 2014-15. The report is a product of the Office of the Chief Economist, South Asian region, which is based in Delhi.

According to the statistics contained in the report, Pakistan emerges as the ‘sick economy’ of South Asia, although this is not prominently highlighted in the report. Among the eight South Asian economies, which are all members of Saarc, Pakistan has the lowest GDP growth rate (except for Afghanistan’s); the lowest export growth in 2013-14 (of about one per cent compared with Bangladesh’s 12 per cent, India’s seven per cent, and Sri Lanka’s more than 13 per cent); the highest rate of inflation (except for India’s); the highest fiscal deficit and the lowest import cover of foreign exchange reserves (of two months as compared with more than five months of Bangladesh, eight months of India and six months of Sri Lanka).

Despite the unfavourable comparison with other South Asian countries, the Bank’s assessment of Pakistan’s performance in 2013-14 is positive and it states in the opening sentence that “Pakistan’s economy was gathering pace in FY2013-14”. However, the basis for such a statement is questionable. The GDP growth rate in 2013-14 is likely to be below 3.5 per cent, given the poor performance of the large-scale manufacturing sector in the last four months of the year. This is the lowest growth rate in the last four years. The agriculture sector has also shown a lower growth rate of 2.1 per cent compared with 2.9 per cent in 2013-14, primarily due to the failure of the cotton crop. Exports grew by only 1.4 per cent in 2013-14, while private investment actually declined by 1.6 per cent in real terms.

The Bank proceeds further to say that “since mid-August, a succession of political blows have knocked steam out of the economy”. This is not substantiated by facts. The month of August 2014 actually saw an extraordinarily high growth rate of more than 20 per cent in FBR tax revenues. During this month, the international trade (exports and imports) volume also increased by as much as 25.2 per cent. On a month-to-month basis, the consumer price index remained virtually unchanged in August and September. Therefore, there is no evidence of any direct negative impact of the dharnas on the economy.

The Bank also praises the “promising progress” by the new government in 2013-14 in implementing a “solid reform programme”, especially in the energy sector. Power tariffs were raised substantially by almost 65 per cent in some cases. There have been, however, no improvements in the management of the sector. Electricity generation has increased by a modest four per cent, more or less, in line with the growth in demand. Consequently, there has been no improvement in the power load-shedding situation. Pepco’s transmission and distribution losses have remained unchanged at the relatively high level of 17.5 per cent. Billing losses have risen sharply by 25 per cent to Rs119 billion. The fuel mix has worsened due to the diversion of natural gas from power generation to fertiliser (urea) production.

On top of all this, transmission bottlenecks have emerged and there have been vociferous complaints recently about over-billing. The circular debt has come back in a big way and estimates are that it may already have exceeded Rs250 billion .

The Bank also highlights the improvement in the balance of payments and the significant strengthening of the reserve position. Foreign exchange reserves did increase from $6 billion in at the end of June 2013 to $9.1 billion at the end of June 2014. However, this does not reflect any improvement in the underlying current deficit position or a major improvement in non-debt creating capital inflows. The bulk of the improvement has come from a peak in net external borrowing of $5.6 billion and one-off inflows. This highlights the continuing vulnerability of the external payments position.

Turning to the outlook for 2014-15, the Bank is quite optimistic about Pakistan’s prospects. It expects GDP growth rate to range from 4.3 per cent to 4.6 per cent, inflation to fall to eight per cent, the current account deficit to rise marginally from 1.2 per cent to 1.4 per cent of the GDP and the fiscal deficit to fall further to five per cent of the GDP.

It is surprising that even though the report came out on October 4, it shows no awareness of the devastating floods which hit Pakistan, especially Punjab, in September 2014. According to estimates by the UN Office for the Coordination of Humanitarian Affairs, 2.53 million people have been affected, 364 lives lost, 107,000 properties damaged and more than 2.4 million acres of crop area inundated. This will imply significantly lower output, especially of rice and cotton. Inclusive of indirect effects, this could reduce the GDP growth rate by up to 1.5 per cent, raise the inflation rate, especially of food items, and necessitate higher imports to make up for supply shortages. Therefore, the Bank’s forecasts for 2014-15, following the floods, are no longer valid.

The final paragraphs of the report show a degree of concern for the first time. Mention is made of the fact that Pakistan’s IMF programme is at a “stand still”. This is attributed to delays in adjustment of power tariffs, implementation of the privatisation programme and in reforms requiring legislative approval (especially with regard to the SBP’s autonomy).The Fund has projected external financing requirements of $10.8 billion in 2014-15. How will this large gap be filled if the Programme remains suspended?

Overall, the World Bank report is positive and appreciative of Pakistan’s recent and continuing progress. This should have a favourable impact on perceptions of foreign investors. But the reality is different, with the country moving into a period of some uncertainty both, on the political and economic fronts.

Published in The Express Tribune, October 24^th, 2014.

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