ISLAMABAD - Pakistan needs accelerated economic reforms to speed up growth, create more jobs and bring more stability by addressing growing fiscal and current account deficits, the World Bank said in a report.

“Growth is expected to continue accelerating, and reach 5.8 percent in the financial year 2019. However, going forward, this momentum is contingent on managing the challenges that have emerged on the external and fiscal fronts. Growth is expected to be driven by public and private consumption, aided by a steady increase in public investment, especially due to projects under the China-Pakistan Economic Corridor (CPEC),” the World Bank’s twice-a-year Pakistan Development Update said.

“The wide current account deficit is expected to remain a concern and pressure on international reserves is likely to persist. The pressure on the current account is expected to continue as the trade deficit will persist during FY18 and FY19. This situation could potentially become unsustainable in the absence of timely corrective policy measures. Exports are expected to recover during FY18 and FY19 as supply-side factors ease, including an improved electricity supply and low domestic lending rates. Imports are expected to grow at a slower pace in FY18 and FY19,” it said.

Supported by a marginal improvement in the economic outlook of the GCC economies, remittance inflows will continue to partly finance the high trade deficit. Increased exchange rate flexibility could result in a depreciation of the Pakistani rupee, which may alleviate some of the pressure on the external account, the report said.

Similarly, further fiscal consolidation will also remain challenging. Fiscal slippages are expected to continue through the election cycle, which will further widen the fiscal deficit during FY18, compared to the 5.8 percent fiscal deficit in FY17. This increase in the fiscal deficit will be driven primarily by a slower increase in government tax revenues (both federal and provincial) and a sharper increase in expenditures. An adjustment in the fiscal position in FY19 post-election will help curtail the fiscal deficit.

“Inflation, after remaining moderate during FY17, is expected to rise steadily in FY18 and FY19. This increase will be driven by higher domestic demand and a slight increase in international oil prices.”

A recent analysis by the World Bank shows that there is a strong and significant relationship between the REER and exports in the medium to long-term, which suggests that increased Pakistani rupee flexibility would help narrow the trade deficit.

The widening macroeconomic imbalances could increase the country's vulnerability to external and domestic shocks. With declining reserves and elevated debt ratios, Pakistan's ability to withstand external shocks will be compromised and the risks will remain predominantly on the downside. Increasing commodity prices, weaker global growth, or adverse geopolitical developments in the region could all test the economy's resilience.

The report stated that the total public debt stood at 68.1 percent of GDP by the end-June 2017, which is 0.5 percent lower than the June 30, 2016, stock of 68.6 percent. This slight decline has occurred at a time when the fiscal deficit has swelled by 1.2 percent of GDP. The improvement stems primarily from the fact that the growth in nominal GDP has slightly outpaced the growth in nominal public debt stock.

There are two other underlying factors at play. First, in a positive development, the government drew down deposits held with the banking sector (including the SBP) during FY17, primarily to retire some of the in-year borrowings from the SBP. Second, favorable currency movements led to a decrease in the foreign currency public debt-to-GDP ratio (by 0.3percent) despite substantial borrowings. Pakistan received record-high gross disbursements amounting to $10.1 billion in FY17 under public and publicly guaranteed (PPG) external debt. Furthermore, disbursements during June 2017 alone touched $2.7 billion for the first time. In totality, some 43 percent came from commercial banks during FY17. Chinese banks dominated this category, lending to the tune of $2.3 billion.

The total domestic debt stood at Rs14.8 trillion as of end-June 2017, registering growth of 9 percent against a three-year average of 12.7 percent. In this context, the deceleration in FY17 is an improvement. Despite vulnerabilities, Pakistan's public debt is expected to fall to 66.4 percent by FY19. This projected declining trajectory (based on the medium-term projections for FY18–19) is due mainly to the nominal growth in GDP outpacing the nominal growth in public debt over the projection horizon. However, this downward trajectory assumes fiscal tightening post-election (2018) and any deviation from the expected path of fiscal consolidation may lead to an upward trend in the public debt.

Pakistan registered a consolidated fiscal deficit (excluding grants) of 5.8 percent of GDP in FY17 – 2.0 percentage points higher than the target set at the start of the year and 1.2 percentage points higher than that of the previous year.

“The total revenue of the government slowed down in FY17 due to the weak performance of the FBR,” the report said. The FBR revenue grew by 8 percent during FY17, compared with the budgeted growth of 17 percent. FBR collection amounted to Rs3,361 billion, equal to 93 percent of the FY17 revenue target. The shortfall was broad-based and equaled almost Rs 260 billion. The lower collection is, in part, a result of relief measures and tax incentives introduced through the federal budget for FY17 to boost investment, exports, and domestic production in the economy. On the other hand, taxes collected by provincial governments grew by 13.6 percent during FY17, although this was lower than the 37.6 percent growth seen in FY16, the report said.

According to the report, recent tax reforms have generated important results, but continuity is crucial. “A comprehensive review of tax policy is required, assessing it against the key principles of neutrality, fairness, and transparency. In addition, a fully automated and able tax administration is imperative to take advantage of modern IT infrastructure that uses the available data to reduce the chances of tax evasion.”

Finally, post-18 Constitutional Amendment, the lack of coordination among different tax authorities have increased the compliance cost of taxpayers. There is a need to establish a coordination mechanism to resolve taxation issues between the federal government and the provinces, and among the provinces.