The building reserves programme of the International Monetary Fund (IMF) for Pakistan is supporting its economy, as there are little improvements in the interest rates and political stability, the World Bank (WB) said forecasting disrupt economy in the future.

According to a report released by the WB on Thursday, 'Global Economic Prospects 2010, Crisis, Finance, and Growth', the WB said, "Ongoing or new IMF stabilisation programmes for Pakistan, Sri Lanka, and most recently the Maldives, steep reductions in interest rates, and improved political stability."

The WB report projected South Asia's gross domestic product average growth to firm from an estimated 6 percent in 2009 to 7 percent in 2010 and 7.4 percent in 2011.

It further forecasted the external demand for goods and services is anticipated to recover, while improving consumer and business confidence, combined with the lagged effects of expansionary monetary and fiscal policy measures and a positive turn in the inventory cycle, should contribute to strengthening domestic demand.

A projected firming of capital inflows will also support regional economic activity. The regional current account deficit is projected to rise modestly, from 1.2 percent in 2009 to 2.2 percent in 2010 and 2.3 percent in 2011, a result of firming domestic demand that is expected to drive import growth ahead of export growth. "Pakistan's fiscal stimulus measures have supported the rebound in output by helping to revive consumer demand," the WB report said.

Pakistan also sought to stimulate its economy through an increase in its public sector development program. While these stimulus measures helped offset the negative effects of the global crisis, they also led to higher fiscal deficits in nearly all of the regional economies. Even before the crisis, sizable fiscal deficits were already a problem for many South Asian economies, where weak tax administration and structure resulted in low domestic resource mobilization.

The report said, "the global financial crisis contributed to a marked deceleration in real GDP growth in South Asia, from 8.7 percent in 2007 to 6.0 percent in 2009, which was largely driven by a pronounced falloff in investment growth and, to a lesser extent, private consumption."

It said, "exports contracted sharply with external demand, the decline in imports was steeper, and net trade actually supported growth on the regional level. As the crisis took hold, equity markets and exchange rates plunged in most countries in the region." Sovereign bond spreads spiked with the contraction in capital flows, as both domestic and international investors sought safe-haven assets outside the region.

The report said the growth has been weakest in countries that entered the crisis with large internal and external imbalances and that were forced to severely crimp domestic demand, such as the Maldives, Pakistan, and Sri Lanka.

A number of regional economies also faced ongoing internal conflicts that continued to disrupt economic activity, notably Afghanistan, Pakistan, Sri Lanka (which ended a decades old civil war in mid-2009, it added. The report said although the global financial crisis had a sharp negative impact on South Asia, the slowdown in regional GDP growth was the least pronounced among all developing regions. This partly reflects the relatively closed nature of the region's economies. Private capital inflows-a key transmission channel of the crisis-are less significant as a share of South Asia's GDP (particularly foreign direct investment), compared with most other regions.

Correspondingly, the region's greater reliance on services trade-roughly double the 7.7 percent average share of GDP for developing countries in 2008-also provided a buffer to the crisis, as services tend to be more resilient during downturns (although smaller countries with important tourism sectors, such as the Maldives, were hit hard). Domestic demand in the region was relatively resilient, having been cushioned by countercyclical macroeconomic policies. Interest rates were rapidly cut across most economies. Although fiscal space in most economies was limited, substantial fiscal stimulus measures were introduced in India (including pre-election spending), Bangladesh and Sri Lanka (in the form of incentives and safety net expenditures). The stabilization and progressive thawing of global financial markets in early 2009 and the rebound of world trade and output growth beginning in the second half of 2009 have contributed to improving conditions in South Asia, the report said.

Since the second quarter of 2009, local equity markets and capital inflows to the region began to recover-largely in line with trends across developing countries. The WB report said while most local stock exchanges have recovered to pre crisis levels, the majority remain well below peak levels posted in late 2007 and early 2008 (in both local currency and US dollar terms). Regional agricultural output was buoyed by a good monsoon in 2008 that contributed to a good harvest in 2009 across much of the region, it added.

The report said the merchandise trade growth remains below previous-year levels for the region, with imports down much more sharply than exports, given the sharp compression of demand in Maldives, Pakistan, and Sri Lanka in particular.

Some sectors also showed marked resilience during the crisis, such as ready-made garments in Bangladesh, where competitive pricing has enabled producers to build market shares (the "Wal-Mart effect") and in Sri Lanka, where long-term strategic partnerships with mid- to high-end retailers in the United States and the European Union, (such as Victoria's Secret, Diesel, and Nike) created a buffer, and in India, where information technology software also proved relatively resilient. Overall, the combination of a sharp fall in the value of imports, a somewhat less steep decline in exports (both reflecting favorable terms-of-trade developments), and resilient remittance inflows meant that current account balances generally improved in 2009. The report said the regional external positions had come increasingly under strain from the multiyear boom in food and fuel prices before mid-2008. During 2009, the Maldives, Pakistan, and Sri Lanka posted the largest adjustments in their current account deficits. staff report