Pakistan to achieve 7pc economic growth: S&P

DUBAI — Pakistan should achieve seven per cent economic growth in the medium-term as structural reforms, privatisation and the gradual deepening of external trade links produce incremental gains, Standard & Poor's Ratings Services said in a report.

By Muzaffar Rizvi

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Published: Sun 25 Feb 2007, 8:37 AM

Last updated: Sat 4 Apr 2015, 8:30 PM

"Growth prospects are underpinned by the rising participation of foreign direct investors in the economy, yielding knowledge transfer and efficiency gains. To boost growth rates beyond these levels, the government will have to address still significant infrastructure and power supply deficiencies, bureaucratic red tape, and security concerns to improve investor confidence," the report said.

In fiscal 2006, Pakistan's growth rate eased back to a still strong 6.6 per cent following the record 8.4 per cent in the previous year. This was largely a reflection of the base effect and agricultural output reverting to average levels following the bumper crops of the previous year.

Moreover, the economy proved resilient in the face of the elevated oil prices of 2006. At the same time, however, a combination of accommodative fiscal policy and high credit uptake underpinned domestic consumption, which served as the main engine of growth.

While the near-term policy mix should feature tighter monetary conditions as a means to rein in the current account deficit, overall growth prospects remain favourable. "In the medium-term, the economy should be able to grow at about 7 per cent," the rating agency said.

Economic reforms: Trade liberalisation and privatisation in the banking, electricity, telecommunication, and energy sectors is generating productivity improvements, and attracts a rising amount of foreign direct investment, the agency noted adding that the cumulative effect of these reforms should put the country on a higher growth path.

The positive outlook reflects the expectation that the government will deepen implementation of current economic policies and maintain general government deficits at 4 per cent of GDP or less. It also reflects the likelihood that Pakistan will continue to enjoy the economic benefits of its close political relationship with the US, including support from official creditors.

Contingent liabilities decline: Over the past seven-year period Pakistan has achieved significant debt reduction through a combination of fast real GDP growth, low to negative real interest rates, primary budget surpluses averaging 2 per cent of GDP, and Paris Club debt relief. Net general government debt declined to about 55 per cent of GDP by the end of fiscal year 2006, from 94 per cent in 2001. The country's favourable debt dynamics also benefited from debt retirement using funds from privatisation.

"Of the projected total outstanding public and public-guaranteed debt of $36 billion, only about 5 per cent will be commercial debt — with the rest sourced on concessional terms from multilateral and bilateral lenders" the report said.

External liquidity adequate: External liquidity remains favourable and financing has been and is expected to continue to be entirely from non-debt creating sources. FDI is exceptionally strong with ongoing privatisation and interest in greenfield projects (56 per cent of total FDI last year) from a diverse base of investors. FDI inflows of $4.5-$5 billion per year are expected in the medium-term, with significant upside potential depending on the realisation rate of large-scale medium-term Chinese investment proposals reported to be worth $25 billion, the report added.

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