WB for steps to open up trade with India

ISLAMABAD: With foreign exchange reserves at a critical level and a flare in Pakistan-India relations, the World Bank has asked Islamabad to take swift action on addressing country specific risks and open up trade with India, among other things, to avoid a looming second balance of payments crisis in five years.

It also wants Pakistan to resolve micro and macroeconomic challenges and take steps for creation of over 11 million jobs in seven years  1.5 million fresh jobs per year until 2020  to stop higher unemployment because higher growth alone would not help.
Pakistans rebound from the global financial crisis has been slow and fragile, and unless the economy changes course swiftly, it could face its second balance of payments crisis in five years, it warns the new political government in an economic memorandum Pakistan: Finding the Path to Job-Enhancing Growth.

The document prepared on the request of the government for a professional roadmap to the countrys deep-rooted challenges, identified poor access to electricity, high macro-fiscal risks, high country risk and sudden stop in external financial inflows as emerging growth constraints for Pakistan.

It also highlighted low access to domestic finance, slow productive diversification and high anti-export bias, ineffective taxation and bad governance, high business regulations and poor civil service as structural constraints.

The report asks the government to take upfront action on structural constraints, including increasing domestic finance to private sector, address bad governance, excess business regulations and poor civil service, improve effective taxation and remove trade barriers if Pakistan has to achieve higher economic growth rate on a longer period.

It also wants Pakistan to create New Special Economic Zones to attract Indian, Chinese and Malaysian firms due to their growth potential.

In the short term, removing distortions and completing Indias normalisation process has promising growth potential to achieve a $95 billion export target by 2015.

Tangible improved customs and logistics procedures at the Wagha border could deliver a visible demonstration effect, it said and proposed policy action on supply chain in textile, car parts and information technologies by setting a minimum level of investment encouraging innovation of 0.5 per cent of GDP.

Removing all trade-related statutory regulatory orders and prohibiting the issuance of new ones would greatly help liberalise trade.

In the medium term, Pakistan needs to reduce the anti-export bias for improve trade competitiveness through a roadmap to simplify tariff slabs to three (0, 10 and 25 per cent) to eliminate privileges.

The WB said the Pakistans recovery from 2008-09 global crisis has been the weakest in South Asia with a double dip pattern (macro imbalances and floods of 2010-11).

Despite some recovery of exports and strong remittances, borderline stagflation continues  modest growth with double-digit inflation, compounded by unsustainable macroeconomic policies and domestic and international armed conflicts.

Hence, Pakistan must now climb out of this untenable situation to a much faster path by taking advantage of its demographic transition to swiftly accelerate growth because its high fertility would double its young population by 2025. Therefore, the need for 1.5 million jobs a year over the next seven years.

But just creating a large number of jobs would not be enough, but creating more productive jobs to move away from poverty, crime and civil conflicts would be necessary. The transformational job-enhancing growth agenda should, therefore, start with a national vision to achieve 7pc economic growth rate and creating 1.5 million jobs year through an explicit or implicit consensus from the main political parties in the parliament.

The bank understands that power crisis be dealt with by cutting average load-shedding by at least half  from over eight hours a day to less than four. The government has already started implementing the World Bank recommendations on this front in the form of reduction in subsidies, anti-energy theft bills and taking in hand governance reforms in power companies etc for ultimate privatisation.

To deal with the sudden stop in external financing, Pakistan needs to rebuild international reserve position to at least three months of imports, more than twice its present level. Restoring sound macro fundamentals and signing of an IMF programme are basic steps in reactivating financial flows. Temporary exchange controls and bridge financing from a few bilateral donors  coalition support fund from the US or deferred oil payments to Saudi Arabia  would help but not bring a permanent solution.

In the medium term, reducing country risk also requires greater political and social stability, translating a potential peace dividend into perceptions of an investment-friendly country with much lower risk.

Also, creating conditions to end credit crunch is the immediate priority.

Favouring mildly positive but low real interest rates and reducing government borrowing from scheduled banks would reduce banks incentives to crowd out private sectors.