Economic downslide challenge to new Govt: WB
Staff Report

ISLAMABAD—Pakistan’s new government must take urgent action to prevent the country’s economy from tipping into crisis, the World Bank warned Thursday. Praful Patel, a vice president at the bank, said the South Asian country needs to make painful adjustments to higher global prices for oil, commodities and foodstuffs or risk a slowdown.
“There is not yet a crisis, but the economic picture for Pakistan is not good,” Patel said. “There is a good economic foundation, but the growth can only continue if Pakistan adjusts to the new global reality.” Patel issued a statement after a three-day visit to Pakistan, which included talks with leaders of the new government taking power after eight years of military rule under President Pervez Musharraf.
Musharraf, who seized power in a 1999 coup, guided Pakistan from the brink of bankruptcy to multiyear economic growth. A United Nations report released on Thursday said that Pakistan’s economy was expected to grow at 6.5 percent this year, despite uncertainty about stability in the country, which faces rising Islamic extremism and a bumpy transition back to democracy.
But some economists warn the current expansion is heavily reliant on a boom in consumer spending and money sent home by Pakistanis working abroad and that the country produces too few high-value exports. In the short term, there is particular concern about the government’s rising budget deficit and a shortfall in the balance of payments. Both are putting downward pressure on the Pakistani currency, the rupee.
Patel noted that foreign investment and remittances have kept pace and that the stock market has posted gains. The Karachi Stock Exchange’s benchmark index closed at a record on Thursday. However, he forecast that the government would miss its targets for the budget and current account deficits as well as for foreign exchange reserves.
The caretaker administration that left office this week had begun reducing subsidies on fuel prices that have bitten deeply into the government’s coffers. The new government must decide where to cut spending and is reportedly eyeing the military budget for possible reductions. The World Bank said its team discussed changes in oil imports, taxation and “prioritization of expenditures.”
“Any adjustment will be painful,” said Patel. “But there must be an appropriate safety net for the poor.” He said that could include direct cash transfers, a mechanism used to relieve people hit by Pakistan’s massive 2005 earthquake. Pakistan’s new prime minister, Yousaf Raza Gilani, is expected to announce steps to address the country’s problems, including high food prices and energy shortages, when he makes his first policy speech in parliament on Saturday. “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 in Pakistan,” Patel said.
The World Bank has said that high international prices for petroleum and food commodities were creating challenges for the Pakistan economy and determine that rapid adjustments and reforms were necessary to avert an economic crisis. “There is not yet a crisis, but the economic picture for Pakistan is not good”, said Praful Patel, World Bank Vice President at the conclusion of his three day visit to Pakistan.
“International prices have continued to rise, but policies and administered prices have not kept pace in Pakistan. During the past few years growth has been robust and there has been significant poverty reduction. There is a good economic foundation, but the growth can only continue if Pakistan adjusts to the new global reality, which includes high prices for oil, commodities and foodstuffs such as wheat. Countries around the globe - including the U.S., Japan and the EU are facing the same reality,” he remarked.
He was of the view that while foreign direct investment and remittances have maintained pace and the stock market has posted gains, the fiscal deficit, inflation, current account deficit and foreign exchange reserves will miss their target this year. Patel met with the economic team, chaired by Finance Secretary Waqar Masood to discuss the economy and how to protect the poor as domestic prices are adjusted, said WB press release.
In meetings with Pakistan Peoples Party Co-chairman Asif Zardari and representatives of Prime Minister Yusuf Gilani’s advisory team, the World Bank team discussed appropriate adjustments - particularly on oil imports, tax policy reforms, prioritization of expenditures and safety nets to protect the poorest, it added. Patel offered World Bank technical assistance to build upon international best practice in responding to the current situation, the press release added.