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Indo-Pak peace raises world confidence

By Nadeem Malik

The prospects of peace between India and Pakistan have increased international confidence and contributed to improved regional creditworthiness, says the World Bank in its latest publication.

"Peace talks between India and Pakistan, coupled with the regional trade initiatives of the South Asian Association for Regional Cooperation (Saarc) may further boost international confidence," says the Global Development Finance 2004, released on Monday. The South Asian GDP rose 6.5 per cent in 2003, a sharp pick-up from the 4.3 per cent registered in 2002. The Bank projected 7.2 per cent growth rate for the region in 2004.

The report says Pakistan has also outlined infrastructure development as one of its priority areas during the next fiscal year with a possible growth target of 7 per cent during 2004-05. The Bank, however, observed that smaller economies in the region would face difficulty from the impending phase-out of the international multi-fibre arrangement in 2005.

The growth in South Asia was driven by rising domestic demand, especially fixed investment - the investment rate consistently increased in the region to reach nearly 25 per cent of GDP currently. The Asian Development Bank has also advised Pakistan to spend an additional $ 1.5-2 billion to prop up the growth rate to 8 per cent in the medium-term. The current investment level in the country is about 16 per cent, which needs to be jacked up to the regional average to ensure sustainability of the growth rate.

From 1992 to 2003, total international investment in developing countries’ infrastructure is estimated to have been $ 622 billion-an average of $ 52 billion a year or 3.8 per cent of total gross domestic investment in the developing world. Infrastructure needs in developing countries remain largely unmet as 1.1 billion people lack access to safe drinking water, 2.4 billion are affected by inadequate sanitation, 1.4 billion have no power, and telecommunication links are five times less dense than in the developed world.

The cost of needed infrastructure investments in developing countries is estimated at $ 120 billion a year from now to 2010 in the electricity sector, and $ 49 billion a year up to 2015 for water and sanitation. The World Bank report recommends that developing countries seek to tap international capital to meet this demand for infrastructure financing by, among others, establishing transparent rules with the assurance that contracts will be respected, strengthening local capital markets, developing public-private risk mitigation instruments, and helping public providers of infrastructure services achieve commercial standards of creditworthiness.

On South Asia, the report estimates the international reserves rose to a record $ 114 billion in 2003, more than double the size in 2002. India accounted for most of this increase, but other economies, notably, Pakistan, also experienced sharp increases in reserves. A decline in the current account deficit — a noteworthy development in the face of rising oil prices for this region as a net oil importer —and rising inflows in the capital account contributed to the increase in international reserves. Workers’ remittances to the region rose further to $ 18.2 billion in 2003 from $ 13.1 billion in 2001. India remained the second largest recipient of remittances (after Mexico) with $ 8.4 billion. In Pakistan, remittance receipts tripled between 2001 and 2003, to reach $ 4.2 billion last year. During the same period, remittance flows to Bangladesh also increased nearly 50 percent.

India joined the top 5 developing country recipients of FDI ($ 4.1 billion in 2003). FDI to South Asia expected to rise from $ 5 billon in 2003 to over $ 7 billion in 2005, assuming that India’s reform programme continues and it continues to attract FDI into call centres and other outsourced businesses. India’s long-term foreign currency rating was upgraded to investment grade by Moody’s in January 2004. Pakistan’s rating was also upgraded last year. In February, S&P assigned a ‘B’ rating to Pakistan’s issuance of $ 500 million fixed rate bonds due 2009.

Aid flows to the region, especially to Pakistan, rose in 2002. Pakistan received $ 2.1 billion, up sharply from $ 0.7 billion in 2000. Bangladesh, and to a lesser extent Pakistan, continue to rely heavily on trade finance. These two countries were among the top 10 recipients of loans and guarantees - over 10 percent as a share of imports - from export credit agencies.

Mansoor Dailami, lead author of the report, said the challenge is to increase the flows to developing countries in a way that is sustainable, which requires channeling them to countries with good policies and into investments that spur long-term growth and poverty reduction.

 



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