Reflection points

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LAHORE: The World Bank released a detailed report on the South Asian economy revealing many things for policy makers to formulate better export policies, inflation control, banking sector and other economic policies . Pakistan, being a developing country in South Asia, can learn a lot from the report.

Energy subsidies in Pakistan have been far higher than in other countries, which face tough fiscal challenges with price variation in international markets.

Data from the 2000 archives show that in response to a 10% increase in world oil prices, consumer price inflation (CPI) increased by 0.3 percentage points in Pakistan.

Many factors contribute to a low correlation, including subsidies or fuel price caps in the domestic market.

Former Prime Minister Imran Khan announced fuel and electricity price relief in February 2022. While these popular decisions may help reduce domestic price fluctuations and some political benefits, these subsidies are also a direct burden. or hidden liability for the government budget, which could increase fiscal vulnerabilities.

Price subsidies also tend to be more important on the consumer side than on the producer side. In Pakistan, between 20 and 30% of consumer energy consumption is made up of crude oil-based sources, compared to nearly half of producer consumption.

Producers may be unable to pass on higher input costs to consumers.

In India, Pakistan, Sri Lanka and Bangladesh, food and fuel prices for utilities are only weakly correlated with world oil prices. South Asian countries are also experiencing persistent supply constraints.

The war in Ukraine and rising energy prices will likely increase transportation time and costs, further increasing backlogs and delivery times.

Banks in Pakistan have focused on lending to the most creditworthy borrowers, with nearly 70% of the loan portfolio geared towards the corporate segment, but microfinance banks (MFBs) which lend to individuals and micro, small and medium-sized enterprises (MSMEs) have seen declining asset quality.

The phasing out of moratoriums and other relief measures may lead to an increase in defaults on existing loans. Due to a higher initial capital adequacy ratio and relatively low capital impact, Pakistan would have the highest capital adequacy ratio after the impact.

Industrial production in Bangladesh and Pakistan is above pre-pandemic levels and has grown more than the global average.

In Afghanistan, India and Pakistan, the gender gap in job re-entry rates is more than 10 percentage points, indicating that women lag far behind in re-entering the labor market.

In March, which is the first full month since the start of the war in Ukraine, inflation in Pakistan continues previous trends, with high inflation in edible oils and fuel-related categories, while inflation in wheat is moderate at 5%.

Pakistan experienced the smallest export contraction in the region in 2020, and the recovery led by the textile sector was also the fastest.

Pakistani merchandise exports fell 54% year-on-year in April 2020 at the height of the pandemic.

Since the end of 2020, the textile sector, which accounts for more than 60% of total goods exports, has led the recovery.

Covid restrictions also eased earlier in the country than in other Asian countries.

This has helped Pakistan divert orders from competitors and keep merchandise exports 40% above January 2019 levels. Knitwear, cotton fabrics and bedding items are among the product groups benefiting export subsidies, in addition to a sharp reduction in import duties on intermediate products for the textile sector and a favorable exchange rate in recent years.

The government also provides subsidies and incentives to other sectors to diversify exports and reduce dependence on textiles.

Additional policies have been put in place to encourage industries to open up to new markets, especially in areas such as pharmaceuticals, engineering products and chemicals.

Going forward, the country will face the challenges of diversifying exports and increasing its low export-to-GDP ratio (currently around 10%), for example, through tariff rationalization to encourage manufacturers to to export and to be competitive on world markets.

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