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

• 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.