ISLAMABAD: The World Bank has forecast firm recovery in Pakistan’s economic growth over the next two years, estimating that the growth is expected to be 3.8 per cent and 4.1 per cent in fiscal years 2012-13 and 2013-14.

In its medium-term outlook for South Asia contained in the just-released ‘Global Economic Prospects 2012’, the World Bank says that the GDP growth in Pakistan was estimated to have increased to 3.6 per cent in the 2011-12 fiscal year after the sharp deceleration experienced in 2010-11.

Despite the pick-up, growth remained well below the regional average and per capita growth below 1.5 per cent.

Lower foreign investment inflows and IMF debt payments coming due could exacerbate balance of payment difficulties, feared the World Bank report.

The economic growth of Pakistan, the second largest economy in the region accounting for nearly 10 per cent of regional GDP, has remained sluggish. High inflation, power shortages and political situation have hampered investment activity and industrial output, and led to a sharp decline in foreign direct investment.

After experiencing heavy damages during devastating floods in 2010, agricultural production revived in 2011-12. However, recurrent power shortages and heavy rains that have damaged standing crops in some parts of the country could result in relatively subdued agricultural performance, the report says.

The report noted that net FDI inflows to Pakistan shrunk by nearly 50 per cent in the first nine months of 2011-12 fiscal year mainly because of deteriorating macroeconomic fundamentals, energy shortages and a difficult political environment.

The current account went from near balance to a deficit of 1.7 per cent of GDP in the first nine months of the 2011-12 fiscal year despite a 21.5 per cent year-on-year increase in remittances to nearly $10 billion during this period.

The report warned that tax base in Pakistan remains very narrow, with a small fraction of the population paying taxes despite recent efforts by the government to improve tax collection and reduce evasion.

The World Bank report points out that South Asia on average has the highest fiscal deficits among the six developing regions.

Pakistan’s fiscal deficit remained close to 7 per cent of GDP. High prices of imported crude oil compared to average levels in previous years have similarly resulted in an increasing subsidy burden in Pakistan.

According to the report, there are signs of an uptick in Pakistan and Sri Lanka, where annualised quarterly inflation is in excess of 14 per cent. However, in Pakistan, the inflation rate is expected to fall modestly from the current high rate.

The report states that GDP growth in South Asia is expected to slow further to 6.4 per cent in 2012, partly due to a weak carryover from the sharp deceleration in the second half of 2011, and to increase modestly to 6.5 per cent and 6.7 per cent respectively in 2013 and 2014.

Economic activity in the region is expected to remain subdued in the medium-term mainly due to continuing external weakness and domestic concerns, including fiscal deficits, high inflation and energy and infrastructure constraints.

Private capital inflows are likely to reach the level reached in 2010 only 2014, says the report.

The fiscal balances of South Asian countries are likely to remain under considerable pressure if crude oil prices remain close to the average level in 2011 and in particular if adjustment of domestic subsidised prices closer to international prices is delayed further, the World Bank report cautioned.

About regional trade, the report says that recent progress on reducing barriers to intra-regional trade in South Asia, if sustained, could expand markets within the region and bring significant benefits, in particular to South Asian economies other than India.

However, tackling South Asia’s “behind the border” constraints remains key to improving the region’s growth prospects, the World Bank report points out.