ISLAMABAD: The World Bank has revised downward Pakistan’s GDP growth projection for the current fiscal year 2023-24 to 1.7 percent from a previous projection of two percent, while saying that under the current policy framework, the country faces sluggish growth and extremely high macroeconomic risks, even assuming effective implementation of the Stand-by-Arrangement (SBA) and a stable political environment.
The bank in its latest report, “Pakistan Development Update: Restoring Fiscal Sustainability” stated that Pakistan’s economy slowed sharply in the fiscal year 2023 with real GDP estimated to have contracted by 0.6 percent, as the decline in economic activity reflects the accumulation of domestic and external shocks including the floods of 2022, government restrictions on imports and capital flows, domestic political uncertainty, surging world commodity prices, and tighter global financing.
The bank stated that consumer price inflation is projected to moderate to 26.5 percent in the fiscal year 2024 and to 17 percent in the fiscal year 2025 due to high base effects and the gradual dissipation of domestic supply chain disruptions, despite the weak currency and upward adjustments to administered domestic energy prices.
The report also noted that policy inconsistency has constrained the effectiveness of monetary policy in curbing inflation.
The current policy framework is inconsistent, with attempts to curb inflation through increases in the policy rate partly undermined by the simultaneous expansion in the monetary base. Higher policy rates are increasing government borrowing costs, driving higher financing needs.
The current macroeconomic outlook represents slow growth, marginal progress with poverty reduction, continued erosion of living standards, and extremely high external risks.
The macroeconomic outlook is uncertain and depends on the effective implementation of reforms. Pakistan faces multiple downside risks including high liquidity risks and low international reserves, unstable political environment and external shocks.
In the short term, macroeconomic stability will depend on the continued implementation of the fiscal year 2024 budget and the IMF-SBA, coherent fiscal and monetary policy mix; market-determined exchange rate and reduced policy and political uncertainty.
Over the medium term, robust economic recovery will depend on a broad-based reform strategy targeting the restoration of fiscal and debt sustainability, fostering private sector growth and competitiveness, minimizing distortive presence of state, and improving financial viability of the energy sector. The previous fiscal year ended with significant pressure on domestic prices, fiscal and external accounts and exchange rate, and loss of investor confidence.
The report noted that amid slowing growth and high inflation, the poverty headcount is estimated to have reached 39.4 percent in the fiscal year 2023—more than five percentage points higher than in fiscal year 2022.
The record high food and energy prices, lower labour incomes, and the loss of crops and livestock due to the 2022 floods significantly impacted real household incomes. Despite a temporary increase in cash transfers and one-time fuel subsidy, overall mitigation measures were insufficient to protect poor and vulnerable households.
“Careful economic management and deep structural reforms will be required to ensure macroeconomic stability and growth,” said Najy Benhassine, World Bank Country Director for Pakistan. “With inflation at record highs, rising electricity prices, severe climate shocks, and insufficient public resources to finance human development investments and climate adaptation, it is imperative that critical reforms are undertaken to build the fiscal space and public means to invest into inclusive, sustainable, and climate-resilient development.”
Without a sharp fiscal adjustment and decisive implementation of broad-based reforms, Pakistan’s economy will remain vulnerable to domestic and external shocks. Predicated on the robust implementation of the IMF SBA, new external financing and continued fiscal restraint, real GDP growth is projected to recover to 1.7 percent in the fiscal year 2024 and 2.4 percent in the fiscal year 2025.
According to the report, the economic outlook is subject to extremely high downside risks, including liquidity challenges to service debt payments, ongoing political uncertainty, and external shocks.
“These macroeconomic challenges can be addressed through comprehensive fiscal reforms of tax policy, rationalization of public expenditure, better management of public debt, and stronger inter-government coordination on fiscal issues. The deepening of reform efforts to regain fiscal and debt sustainability are imperative for a longer-term recovery,” said Aroub Farooq, economist at the World Bank, and author of the report.
To regain stability and establish a base for medium-term recovery, the report recommends reforms to drastically reduce tax exemptions and broaden the tax base through higher taxes on agriculture, property and retailers; improve the quality of public expenditure by reducing distortive subsidies, improving the financial viability of the energy sector, and increasing private participation in state-owned enterprises; and strengthening management of public debt through better institutions and systems, and by developing a domestic debt market.
Benhassine said that the World Bank disbursed $2.1 billion last year, which was significantly higher than the previous year of $1.15 to $1.2 billion due to an increase in cash transfers in response to high floods.
For the current fiscal year, we are expecting to disburse around $1.5 billion to $1.6 billion disbursement out of the portfolio in the current fiscal year as depends on the project implementation and on top of this, $350 million under the Resilient Institutions for Sustainable Economy (RISE-II) programme, he added.
The bank officials, however, ruled out debt restructuring for the time being for Pakistan. Election-related policy slippages and new domestic or external shocks also pose major risks to the external balance and financial sector stability.
The CAD is expected to widen to 1.4 percent of GDP in the fiscal year 2024 and further to 1.5 percent in the fiscal year 2025, primarily on account of higher imports. With the slight recovery in revenue partly due to the resumption of growth and imports, and continuation of expenditure restraint, the primary deficit is expected to remain modest, declining to 0.4 per cent of GDP in fiscal year 2024 and further to 0.3 per cent in fiscal year 2025.
However, the weaker currency and high domestic policy rates will increase interest payments. Subsequently, the fiscal deficit will decline only marginally to reach 7.7 per cent in fiscal year 2024 and inching down to 7.6 per cent in fiscal year 2025.
Gross financing needs will remain sizeable throughout the projection period because of maturing short-term debt (though short-term deposits are expected to be rolled over), multilateral and bilateral repayments, and Eurobond maturities.
Copyright Business Recorder, 2023