The World Bank has projected Pakistan’s economic growth at 4.5 per cent for the ongoing financial year, which is far less than the government’s estimate of 5.5 per cent.

“GDP growth is projected to accelerate to 4.5 per cent in FY2015/16 and 4.8 per cent in FY2016/17, supported by strong services growth and a slight improvement in the industry sector”, stated the World Bank’s new report, Pakistan Development Update. The WB forecasted slight higher growth for the ongoing financial year against what the country achieved last year, 4.2 percent. However, the rate is well below than the government’s projection of 5.5 percent.

The International Monetary Fund (IMF) had already projected 4.5 percent GDP growth for Pakistan.

The WB’s report stated that outlook for Pakistan’s economy is supported by relatively low inflation, particularly low oil prices, and continuous fiscal consolidation. Reforms are expected to continue and support easing of energy constraints and improvements in the economy’s competitiveness. Nonetheless, this outlook is subject to substantial external and domestic risks. Investment levels remain low given weak investors’ confidence. Removing infrastructure bottlenecks, especially in energy, will be crucial to accelerate growth and its long-term sustainability. Security situation, though improved, still affects growth prospects negatively.

The WB also warned of expected increase in inflation, which might surge to 5 per cent from existing 1.65 percent of four months. “A possible adverse impact of prevailing low food prices on next year crops production, pick-up in aggregate demand on the back of historic low interest rates and weak performance of commodity producing sectors represent upside risks for inflation. Any upward adjustment in electricity and gas tariffs in the ongoing reform process also poses upside risks to inflation,” the report stated.

According to the report, Pakistan’s budget deficit would remain at 4.2 percent of the GDP during current financial year as against the government’s target of 4.3 percent. Fiscal consolidation is projected to continue over the medium term on the assumption of strong tax revenue efforts by the government as well as gradual phasing-out of energy-related subsidies and of contingent liabilities on loss-making SOEs.

The current account deficit narrowed to $2.6 billion in FY2014/15 compared to $3.1 billion in the previous year, a result of record high remittances in the order of $18.7 billion. External financial inflows continued strong, although lower than in the previous year. As a result, the balance of payments was positive for the second year in a row.

The report also discussed the importance of increasing efforts to attract more Foreign Direct Investment from the current low levels of 0.3 percent of GDP, by improving the overall business climate and address regulatory weaknesses at the sectoral level that may be affecting the country’s ability to attract investment. The government is implementing a number of reforms to improve the country’s competitiveness. These include efforts to revive the privatization process, which will increase efficiency in management and improve service delivery, to improve access to and the quality of electricity, to promote financial inclusion and to simplify the trade regime and make it more transparent.

“There is an improvement in Pakistan’s overall economic environment. With macroeconomic stability largely restored, Pakistan can focus now on boosting development outcomes, which are not where one would expect, given the country’s income level”, says Patchamuthu Illangovan, World Bank Country Director for Pakistan. “To improve the country’s competitiveness, it is extremely important that the next phase of reforms is implemented and that Pakistan increases both public and private investment levels, which are among the lowest in the world.”

Total public debt stood at 64.6 percent of GDP at the end of FY2014/15, a slight decline from the previous year. Domestic debt continues to dominate the debt stock, despite healthy disbursements by the IFIs, the continuation of the IMF program and the successful issuance of international bonds. As a result, the balance of payments was positive for the second year in a row and international reserves increased by US$4.4 billion to US$13.5 billion by end of FY2014/15 or more than three months of next year’s imports (goods and services).