LAHORE: The economic growth rate picked up modestly in 2015-16, but there was no visible effort to address structural issues, stated annual review of the economy released by the Institute for Policy Reforms (IPR) on Monday.

The report, however, recognises that some economic indicators have improved which include fiscal deficit, inflation, and the current account deficit.

It further says for the first time in many years, the government achieved and exceeded its FBR tax collection target, which grew by 20 per cent. Current expenditure remained within the budget. Low mark-up increased demand for private credit.

However, the economy`s future prospects depend on much-neededpolicy changes. There are fundamental issues that prevent the economy from achieving sustained growth. The economic growth must be based on two pillars: improved long-term fundament als, and higher level of productivity. Whereas some fundamentals have improved, the economy suffers from vulnerabilities.

Public debt has increased rapidly with some external financing procured at high cost.

The report states that Pakistan`s external sector is weak. Exports fell in 2015-16, FDI is low despite inflows from China, and workers` remittance register a modest growth. However, it can drop or slow down because of the effects of energy prices on Middle Eastern economies.

Quoting the International Monetary Fund, the report states in the nextfouryears,current account deficit will remain between -1.8pc to -2.3pc of GDP and FDI will remain modest. Annual external financing needs will grow from $7.3 billion in 2015-16 to $14.4bn in 201920. Short-term debt is expected togrow steeply from 4.2 to 8pc of GDP.

Higher productivity, the second growth pillar, comes from better infrastructure, upgraded sl(ills, research and development, and improvement in governance to reduce transaction cost. So far we have not seen a major policy initiative to empower economic players and improve governance. The governments, federal and provincial, have yet to launch a meaningful programme to invest in the people, the report says.

The productive sector of the economy remains sluggish as production of major crops fell by 6.25pc.

IPR fears that there may be structural issues. Policymakers have done little to address water availability and its efficient use. In fact, federal allocation for water sector has declined in the last two years.

Industry grew by 3.21pc. It is encouraging to see 105pc increase in private sector credit.

Half of the additional credit has gone into fixed investment, though the share of manufacturing in new private investment has declined.

The economy is still constrained bypower shortage. Though new investment will increase generation capacity, there is no policy shift to make the total power supply chain efficient.

Similarly, savings and investment remain below the economy`s need to grow. The government is expected to make negative savings for the foreseeable future. While development expenditure, including CPEC, has increased from the previous year, questions remain about project selection, transparent procurement, and effective project management. These issues reduce the returns to the economy from PSDP spending.

To support growth, policy makers must review the political economy. It shows most obviously in the structure of public Knance bothin revenue collection, but equally in expenditure priorities. Delay in addressing this issue leads to high government debt and does not allow sufficient public investment.

The economy needs an urgent and effective response to the constraining structural issues, the report concludes.