Speeches & Transcripts

Economic Dialogue with Key Ministers and Officials Economic Trends and Implications for Pakistan

February 9, 2016

Jan Walliser Economic Dialogue with Key Ministers and Officials Economic Trends and Implications for Pakistan Pakistan

As Prepared for Delivery

  • Minister Dar and Minister Iqbal; Your Excellencies; Chief Secretaries of the Provincial Governments; and esteemed guests:
  • It’s a great pleasure to join you here today, to discuss economic development and inclusive growth.
  • It’s certainly very encouraging to see the strong progress that Pakistan has made over the past few years.
  • Our discussion today will be a great opportunity to explore the many avenues we can pursue to help accelerate growth – and to ensure that it will be widely shared.
  • I’d like to offer some thoughts about the current global economic environment; about the regional perspective from South Asia; and about what the current global and regional trends mean for Pakistan’s prospects.
  • Global growth continues to be disappointing, particularly among BRIC countries.
    • The OECD economies have recovered somewhat after the global financial crisis – but not enough to pick up the slack that persists in emerging economies.
    • Global growth in 2015 fell short of expectations: It was just 2.4 percent – held back by weak capital flows to emerging and developing countries, weak trade, and low commodity prices.
    • The simultaneous slowing of the largest emerging markets — Brazil, Russia and China – poses the risk of spilling over and weakening rest of the world economy.
    • These spillover effects are already reflected in a decline in Pakistan’s exports, across the board.
  • We project a modest increase in global growth to 2.9 percent in 2016.
    • But this is predicated on an orderly rebalancing in China; continued gains in high-income countries; a gradual tightening of financing conditions; and a stabilization of commodity prices.
  • These projections are subject to substantial downside risks.
    •  Those risks include such factors as a disorderly slowdown in major emerging-market economies, particularly China; an accelerated rise in U.S. interest rates that tighten financing conditions rapidly; and persistently weak commodity prices.
  • The current weakness in emerging markets is partly explained by cyclical factors.
    • Commodity prices fell further in the second half of 2015, and are now only a fraction of the record-high prices that we saw in 2008 – or even the more moderate prices that prevailed from 2011 to 2014.
    • Abundant supply (due in part to investment during the decade-long price boom) and softening demand are the main factors behind that continued weakness.
    • Many analysts are now expecting a prolonged period of low commodity prices.
  • Capital inflows to developing countries dipped to a post-crisis low in 2015.
    • A gradual rise in global interest rates and continued weakness in commodity prices is affecting FDI decisions – particularly in mining – while the cost of infrastructure financing is expected to rise.
  • Despite global headwinds for emerging markets, the South Asia region, primarily a commodity-importing region, is benefiting from the low commodity prices. Fiscal and external balances are improving and the region is projected to be the fastest growing region in 2016.
  • What does this mean for Pakistan?
  • Let me briefly share our thinking about the risks and opportunities that we see going forward.
  • Pakistan has also benefited from low commodity prices, being a net commodity importer.
    • Low commodity prices have allowed the country to embark on a fiscal consolidation effort, which is showing some results.
    • A declining import bill has also improved external balances.
  • We project a gradual growth acceleration to 4.8 percent by 2017 – slightly lower than the Government’s targets.
    • Growth will be supported by consumption (remittances) and reinvigorated investment, both public and private.
    • Yet there are significant downside risks to this outlook, because of the uncertainty of global developments.
  • Pakistan’s exports declined by 11 percent in the first half of the current fiscal year*.
    • The declines have been across-the-board in both products and markets – but developments in China are of particular concern to the Pakistani economy.
      • Among all the countries of South Asia, Pakistan is the country most exposed to China in terms of its exports.
      • Almost 10 percent of Pakistan’s exports go to China, primarily raw materials like cotton yarn, chromium ores, raw hides, marble, and articles made of copper.
      • The slowdown in China is already affecting Pakistan exports, which shrunk by 9.3 percent in the first half of FY16. Any further slowdown in China could lead to further declines.
  • Pakistan remains one of the world’s largest destinations for remittances, and remittances are a major source of financing for the economy’s trade deficit.
    • More than 60 percent of Pakistan’s remittances originate from the countries of the Gulf Cooperation Council.
    • his could be a source of concern, given the projections for oil prices.
      • Remittances from GCC countries have continued to grow over the past 6 months – but at a much slower pace than before.
      • But the persistently low price of oil may eventually affect public investment in GCC countries, and therefore construction – a sector in which many Pakistani migrants are employed.
      • Pakistan should monitor some of the drivers of remittances, such as government budgets in GCC countries.
      • It will also be important to monitor oil-price projections, for example the World Bank just revised downward our oil-price projections for 2016 from US$51 to US$37.
  • To be able to better manage these external risks, Pakistan can continue building external and fiscal buffers.
    • Fiscal consolidation will lower debt levels, creating some space for countercyclical policy should the need arise.
    • Efforts to improve competitiveness and increase FDI and exports would put the external account on a much stronger footing, reducing the reliance on remittances.
    •  Specifically, efforts to diversify export markets could reduce reliance on China. For example, there is room for increased intra-regional trade, since intra-regional exports are only 2 percent of total exports – compared, for example, to 35 percent in East Asia.
  • Now, let me point out some of the opportunities that can be seized.
  • The recent pickup in growth is encouraging.
    • Further acceleration of growth will create more jobs for the large number of young people who are joining the workforce every year.
    • If Pakistan could achieve a GDP growth rate closer to that of China or other fast growing countries in the region, that acceleration would quadruple Pakistan’s GDP per capita within a generation.
    • Given the strong relationship between overall economic growth and poverty reduction that we have seen in Pakistan in the past, stronger growth would allow Pakistan to eliminate extreme poverty within a generation**.
  • But to accelerate growth, Pakistan will need to invest more.
    • Pakistan is now investing only 15 percent of GDP.
      • That’s one of the lowest investment rates in the world – and it’s only about one-half of the average in South Asia.
    • Current government efforts are geared toward addressing some of the constraints that inhibit increased investment. These efforts include:
      • Increase revenue collection and therefore fiscal space for public investment, without crowding out private investment through public borrowing;
      • Improve the investment climate;
      • Continue with ongoing reforms in the energy sector to address electricity shortages;
      • And improve access to finance.
  • Achieving an accelerated growth trajectory would help Pakistan’s economy create more and better jobs for its growing population –
    • and that would help fulfill the goals that are central to the mission of the World Bank Group:
    • eliminating extreme poverty by the year 2030, and building shared prosperity.
    • As we work together to sustain pro-growth investment and strengthen your economy’s performance, I feel confident that Pakistan is capable of achieving even greater economic results.
  • Thank you very much. 

*Fiscal year in Pakistan runs from July to June, i.e., the current FY 2015/16 means July 01, 2015 – June 30, 2016.

**According to the latest published data in 2010/11, Pakistan’s poverty rate is 12.4 percent.