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Pakistan Economy to Grow 5 percent over next two year as investment to rise in power and transportation owing to CPEC

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Pakistan economy has strengthened following successful completion of its three year program with International Monetary Fund where the economy to grow by 5 percent over the next two years because of China-Pakistan Economic Corridor projects as infrastructure gaps to reduce through increased investment in transportation and power.

Willam Foster analyst for Pakistan at Moody’s said that in exclusive interview to this scribe that fiscal deficits have narrowed, foreign exchange reserves have improved and some structural reforms have advanced.

Real GDP growth picked up to 4.7% in FY2016 from 3.7% at the onset of the IMF program in FY2013.  However, Pakistan’s growth potential is limited by the supply-constrained nature of the economy.  Moving forward, we expect growth to increase to about 5.0% over the next two years as the China-Pakistan Economic Corridor (CPEC) project begins to reduce infrastructure gaps through increased investment in transportation and power.

“One of the key weaknesses of Pakistan’s sovereign credit profile is the relatively high level of government debt and exposure to foreign currency risk” Foster said.  At about 67% of GDP in FY2016, Pakistan’s general government debt level is materially higher than that of B3-rated peers (which have a median debt level of about 50% of GDP).  Meanwhile, the foreign currency portion of outstanding government debt, at about 30% of total debt, exposes the government's balance sheet to foreign exchange rate risk.

Pakistan's limited tax base restricts its ability to narrow fiscal deficits, while low savings and shallow capital markets hinder stable domestic financing of sizable budget deficits.  Successful efforts by the government to address these issues would help strengthen the country’s sovereign credit profile. 

Implementation of CPEC will, over time, address supply-side constraints through investment in transportation and power generation infrastructure, thereby bolstering Pakistan's growth potential.  However, security concerns and challenges to project coordination and government effectiveness will continue to present project implementation risks.  

“We expect the general government debt-to-GDP ratio to remain near current levels over the next two years” Foster pointed. 

However, external debt interest payments will likely rise as a result of the financial inflows that will accompany CPEC projects. The near $50 billion China-funded investment deal to boost transportation and power infrastructure should gradually bolster Pakistan’s growth potential by reducing supply-side bottlenecks. However, in addition to foreign direct investment inflows, project capital expenditure and imports will also be financed through external loans. As a result, debt levels may rise and interest payments on such debt would contribute to a steady increase in income outflows, thereby exacerbating the current account deficit.

Posted on: 2017-04-12T10:14:00+05:00

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