By Abdul Wajid Khan ISLAMABAD, April 25 (INP-WealthPK): The World Bank says a well-functioning financial sector that allocates capital to its most productive uses is central to unlocking private investment and Pakistan’s growth potential, reports WealthPK. According to the biannual report of the bank on Pakistan Development Update for April 2022, the country’s financial sector remains underdeveloped. Credit to the private sector is low compared to peers and has trended downward since 2005. It is also concentrated in the corporate segment with most of the financing being extended for working capital and trade, rather than growth-enhancing fixed investments. The underperformance of the financial sector is driven by structural impediments to not only the supply, but also the demand for finance. Extensive government borrowing from the financial sector has been the single largest constraint to the enhanced flow of financing to the private sector. Other important factors include low domestic saving, growing but still limited financial inclusion, and market failures in the form of inadequate financial infrastructure. Resolving these constraints in the medium to long-term requires concerted efforts by the government, regulators, and other stakeholders. In addition, five growth areas offer significant potential to unlock greater financing flows toward the real economy in the short to medium-term. These are: a) digital finance; b) risk capital; c) microfinance; d) development finance; and e) capital markets. The report highlighted that on the back of high base effects, recent monetary tightening and stronger inflation, real gross domestic product (GDP) growth is expected to moderate to 4.3 and 4.0 % in the ongoing financial year (FY22) and FY23, respectively before recovering to 4.2 % in FY24. This recovery is predicated on continued macroeconomic stability and a narrowing of the fiscal and external deficits in the medium term. Due to faster import than export growth in the first half of the FY22, the current account deficit is expected to increase to 4.4 % of GDP in FY22. Moderating demand pressures due to monetary tightening, lower global commodity prices and the weaker currency are expected to dampen imports in next financial year (FY23). With the implementation of reforms to reduce import tariffs on relevant intermediates for the export sector and increased allocations for export refinance schemes, the current account deficit is expected to further narrow to 3.0% of GDP in FY24. The fiscal deficit (excluding grants) is projected to widen slightly to 6.3% of GDP in FY22, on the back of higher spending on Covid-19 vaccine procurement, settlement of energy sector arrears, development spending, and the recently announced food and energy subsidies. It is projected to gradually narrow over the medium term as revenue mobilization measures take hold, particularly General Sales Tax (GST) harmonization and Personal Income Tax (PIT) reform. Public debt as a share of GDP is projected to remain high, but gradually decline over the medium term. However, in the absence of implementation of critical reforms, fiscal sustainability risks can increase. The macroeconomic outlook is predicated on the IMF program remaining on track. Macroeconomic risks are strongly tilted to the downside. They include faster-than-expected tightening of global financing conditions, potential further increases in world energy prices, and the possible risk of a return of stringent Covid-19-related mobility restrictions. Moreover, domestic political uncertainty and policy reform slippages can lead to protracted macroeconomic imbalances. The report said economic momentum continued during the first half of the (FY22) as indicators mostly signalled positive trends. With sustained improvement in community mobility and still-robust official remittance inflows, private consumption is estimated to have increased. Similarly, public and private investment is expected to have grown with the strong growth of machinery imports and government development expenditure. Government consumption is also estimated to have grown due to vaccine procurement. On the production side, agricultural output, mainly rice and sugarcane increased, reflecting better weather conditions. Rising food and energy inflation is expected to diminish the real purchasing power of households, disproportionally affecting poor and vulnerable households that spend a larger share of their budget on these items. Strong aggregate demand pressures, in part due to accommodative fiscal and monetary policies, paired with the continued anti-export bias of the national trade tariff structure, have contributed to a record-high trade deficit, weighing on the Rupee and the country’s limited external buffers. Given the severity of the imbalances, macroeconomic adjustment measures, specifically fiscal consolidation to complement the ongoing monetary tightening, are urgently needed.