Growth prospects

The Pak Banker - - FRONT PAGE -

Ac­cord­ing to lat­est me­dia re­ports, the World Bank has pre­dicted global eco­nomic growth to rise to 3.1 per­cent dur­ing the cur­rent cal­en­dar year, as there are vis­i­ble signs of re­cov­ery in in­vest­ment, man­u­fac­tur­ing and trade. Ex­port­ing de­vel­op­ing economies are ben­e­fit­ing from firm­ing com­mod­ity prices. But ex­perts say this is a short-term up­swing. Over the longer term, slow­ing po­ten­tial growth-a mea­sure of how fast an econ­omy can ex­pand when la­bor and cap­i­tal are fully em­ployed-puts at risk gains in im­prov­ing liv­ing stan­dards and re­duc­ing poverty around the world. Growth in ad­vanced economies is ex­pected to mod­er­ate slightly to 2.2 per­cent in 2018, as cen­tral banks grad­u­ally re­move their post-cri­sis ac­com­mo­da­tion mea­sures and as an up­turn in in­vest­ment lev­els off.

On the other hand, growth in emerg­ing mar­ket and de­vel­op­ing economies as a whole is pro­jected to strengthen to 4.5 per­cent this year, as ac­tiv­ity in com­mod­ity ex­porters con­tin­ues to re­cover. Ac­cord­ing to the WB re­port, 2018 is on track to be the first year since the fi­nan­cial cri­sis that the global econ­omy would be oper­at­ing at or near full ca­pac­ity. With slack in the econ­omy ex­pected to dis­si­pate, pol­i­cy­mak­ers would need to look be­yond mon­e­tary and fis­cal pol­icy tools to stim­u­late short­term growth and con­sider ini­tia­tives more likely to boost long-term po­ten­tial. The slow­down in po­ten­tial growth is the re­sult of years of soft­en­ing pro­duc­tiv­ity growth, weak in­vest­ment, and the ag­ing of the global la­bor force. The de­cel­er­a­tion is wide­spread, af­fect­ing economies that ac­count for more than 65 per­cent of global GDP.

Surely, with­out ef­forts to re­vi­tal­ize po­ten­tial growth, the de­cline may ex­tend into the next decade, and could slow av­er­age global growth by a quar­ter per­cent­age point and av­er­age growth in emerg­ing mar­ket and de­vel­op­ing economies by half a per­cent­age point over that pe­riod. For Pak­istan the World Bank has pro­jected 5.5 per­cent growth rate in the cur­rent fis­cal year against the bud­geted 6 per­cent. This pro­jec­tion is premised on strong ac­tiv­ity in con­struc­tion re­lated to the projects un­der China Pak­istan Eco­nomic Cor­ri­dor (CPEC), re­cov­ery in agri­cul­tural pro­duc­tion (based on low out­put in the year be­fore) and a ro­bust do­mes­tic de­mand sup­ported by en­hanced credit and in­vest­ment.

But there are many hur­dles in the way. The gov­ern­ment has only re­leased 42 bil­lion ru­pees out of the to­tal bud­geted 187.3 bil­lion ru­pees for CPEC projects which in­di­cates a slow­down in in­fra­struc­ture projects with a con­se­quent neg­a­tive im­pact on con­struc­tion ac­tiv­ity. Se­condly, the farm sec­tor is un­der con­sid­er­able stress for a va­ri­ety of rea­sons rang­ing from water short­ages to higher costs of pro­duc­tion rel­a­tive to other coun­tries. No doubt, to­tal credit to the pri­vate sec­tor has in­creased - a strong sign that in­vest­ment is pick­ing up. How­ever, sources re­veal that the rise in credit is not only be­ing used for new in­vest­ment or rein­vest­ment in ex­ist­ing units but also to meet the liq­uid­ity needs of sev­eral units due to the Fed­eral Board of Rev­enue de­lay­ing re­funds to show rev­enue fig­ures that are bet­ter than is in fact the case.

A ro­bust do­mes­tic de­mand in Pak­istan is a fair as­sump­tion given that 2018 is an elec­tion year dur­ing which tra­di­tion­ally the gov­ern­ment re­leases large chunks of funds to mem­bers of par­lia­ment for de­vel­op­ment work. It is rel­e­vant to point out here that ro­bust do­mes­tic de­mand has not al­ways re­flected in­creased sales of do­mes­ti­cally pro­duced goods. Pak­istan has por­ous bor­ders with In­dia and Afghanistan where smug­gling flour­ishes while barter across the bor­der trade with Iran is also sig­nif­i­cant. Since in­vest­ment un­der CPEC/PSDP has slowed down due to lack of gov­ern­ment dis­burse­ments, the growth rate may not be as high as pro­jected. The sit­u­a­tion calls for ur­gent ac­tion to stim­u­late growth in all sec­tors of the econ­omy.

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