Pakistan's economy is showing signs of recovery underpinned by falling global oil prices and the expected uptick in regional economic growth, the Asian Development Bank (ADB) said in a major new report released on Tuesday.

The Asian Development Outlook (ADO) 2015, ADB's flagship annual economic publication, forecasts Pakistan's economic growth in 2015 to modestly improve to 4.2 percent and to 4.5 percent in 2016, subject to steady progress in macroeconomic and structural reforms, and stable security, political, and weather conditions.

In 2014, the country exuded renewed confidence with higher foreign exchange reserves, lower fiscal deficit and moderate inflation. However, gross domestic product (GDP) growth is still below the rate required to absorb a growing labor force.

"We expect Pakistan's economy to continue push forward with a modest growth trajectory. Pakistan needs to attract investments to create jobs, reduce poverty and boost economic growth, which to a great extent depends on continued stability, a better investment climate and enabling policy reforms," explained Werner Liepach, country director for ADB in Pakistan.

"Ongoing efforts to make the power sector financially viable and reforms of public sector enterprises through restructuring and/ or privatization are vital for macroeconomic gains."

Energy and security challenges continue to weigh on Pakistan's business climate.

A key risk to the fiscal performance stems from the rebuilding of circular debt, high security spending, and low revenue collection.

Attracting higher private investment also requires policy measures to boost the export competitiveness of Pakistani manufacturers, accelerate financial sector development, increase public sector investment in infrastructure, and a competitive exchange rate.

Boosting manufacturing is a key policy challenge highlighted in the ADO.

Pakistan's economic transformation has largely bypassed deepening and diversification of manufacturing as it evolved from agriculture to largely low productivity services.

Enhancing industrial competitiveness will require the country to address policy distortions, lower trade barriers, create a business-friendly environment with a stable microeconomic framework, and improve infrastructure, access to finance, and human development, the report says.

Pakistan is implementing an economic reform program underpinned by a 6.7-billion-U.S. dollar Extended Fund Facility arrangement with the International Monetary Fund, which recently completed its 6th review for release of the 7th tranche.

"The robust implementation of the reform program helped entice investors' interest and has facilitated restoration of program lending from multilateral donors including the ADB. Pakistan can use fair winds to stay on course and continue to improve its overall macroeconomic performance," Liepach concluded. Endi

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