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ISLAMABAD: The World Bank has projected positive growth return for Pakistan in fiscal year 2023-24, but at a rate of only 1.7 per cent, while saying that the economy remains dependent on capital inflows to finance substantial fiscal and current account deficits.

The bank in its latest report, “South Asia Development Update Toward faster, cleaner growth”, stated that Pakistan’s economic situation is fragile.

The US dollar value of goods imports shrank by 26 percent in the year to August 2023 as a result of low demand alongside import and capital controls. Input shortages have affected production, with exports declining five per cent in the year to August and industrial production shrinking by 15 per cent in the year to June 2023.

Pakistan’s GDP projected to recover to 1.7% in FY24: World Bank

Pakistan’s economy is estimated to have shrunk by 0.6 per cent in the fiscal year 2022-23, reflecting widespread damage from the 2022 floods, elevated inflation, and difficulties with its balance of payments.

The Bank stated that import controls intended to narrow the trade deficit have also impeded the supply of industrial raw materials and depressed growth more than expected.

These controls have been removed this year as an IMF lending program has stabilised the currency and boosted business confidence. Nonetheless, the economy still faces substantial challenges from continued inflation pressures, tight fiscal policy related to debt repayments, and extensive flood damage.

Pakistan’s foreign exchange reserves remain low, leaving the country with limited buffers against external shocks, the bank added.

The bank stated that not all countries in the region are growing fast, and three— Bangladesh, Pakistan and Sri Lanka— are in acute crisis.

Activity in Bangladesh, Pakistan, and Sri Lanka has continued to suffer from the aftermath of recent balance-of-payments crises. All three countries have recently begun to implement IMF-supported policy programmes to stem capital outflows and improve debt sustainability.

Activity in all three cases has continued to be hampered by input shortages related partly to higher import costs and supply disruptions associated with remaining import restrictions. In all three countries, fiscal deficits remain large, while current account deficits have improved amid sharp import compressions.

The rise in global prices resulting from the end of the pandemic and Russia’s invasion of Ukraine worsened local vulnerabilities in several countries in the region, leading to increases in current account deficits and currency depreciations. These were met with the imposition of import controls.

As a result of these overlapping factors, several countries saw large increases in domestic inflation, especially Bangladesh, Nepal, Pakistan, and Sri Lanka, it added.

In Pakistan, consumer price inflation stood at 27 per cent in the year to August, down from a peak of 38 per cent in May. The decline reflected the stabilisation of the exchange rate since the beginning of the year, following 18 months of substantial depreciation, as well as, an unwinding of the food price spike caused by the widespread damage from last year’s floods.

The central bank has tightened monetary policy to combat high inflation, increasing its benchmark interest rate by 100 basis points most recently in June, to 22 per cent.

Financial stresses were most severe in Pakistan and Sri Lanka. In Pakistan, the rupee depreciated sharply between early 2022 and early 2023 and has been broadly stable since. Last year’s attempts to limit capital outflows through import and capital controls diverted remittance inflows from formal channels, contributing to shortages of foreign currency.

In both Pakistan and Sri Lanka, foreign reserve coverage is low, asset quality is weak in both the bank and non-bank financial sectors, and buffers against future shocks are thin.

Compared to the spring edition of this report, the 0.3 percentage-point downgrade for 2024 is accounted for by lower projected growth for Bangladesh and Pakistan. Both countries are struggling to emerge from balance-of-payments problems.

Fiscal policy is expected to weigh on growth. Primary fiscal deficits are expected to narrow over the projection period, particularly in Bangladesh, Pakistan, and Sri Lanka, as these countries consolidate their fiscal positions in line with their IMF-supported policy programs.

The floods that submerged one-third of Pakistan last year, causing economic losses equivalent to more than four per cent of GDP.

According to the Global Climate Risk Index, Bangladesh ranks seventh, Pakistan eighth and Nepal tenth among the countries most severely affected by extreme weather events globally during 2000–19.

The bank further stated that in Bhutan, Pakistan, and Sri Lanka, the average annual growth rate of investment in the past five years has been negative or near zero, with public investment particularly weak in Pakistan and private investment growth particularly weak in Bhutan.

In Pakistan, certain tax policies discourage investment in the tradable sector, and certain investment laws discriminate against foreign investors. In Bhutan, Nepal, and Pakistan, reducing subsidies or budgetary support to state-owned enterprises could allow for greater private sector participation while also increasing fiscal space.

In Pakistan, state-owned enterprises tend to have low investment rates, while also consuming government resources equivalent to around 23 per cent of the fiscal deficit in fiscal year 2023.

Pakistan could boost productivity, diversify its exports, and increase product sophistication by reforming export subsidy and import duty schemes.

In Pakistan, interest payments accounted for more than half of federal current government expenditures in fiscal year 2023.

The report noted that in 2022, the number of product groups affected by various restrictive import measures in Bangladesh was seven times the EMDE average, and more than 10 times the EMDE average in Pakistan and Sri Lanka. While these restrictions may have helped reduce pressures in the external sector, they have also led to import shortages and depressed economic activity.

The most recent restrictive measures include a profit repatriation requirement for foreign investors in Bangladesh, foreign exchange quotas in Bhutan, increased cash margin requirements in Nepal, and increased scrutiny of the repatriation of revenues from exports in Pakistan.

Such restrictions can be circumvented, for example by channelling foreign exchange through informal markets such as Hundi and Hawala. This circumvention may eventually lead to even greater losses of foreign reserves.

Lowering these barriers to trade and capital flows could help the region integrate into the global marketplace, with substantial benefits to long-term productivity. Pakistan, could boost productivity, diversify its exports, and increase product sophistication by reforming export subsidy and import duty schemes.

Four South Asian countries have adopted debt ceilings—60 per cent of GDP in India, Maldives, Sri Lanka, and Pakistan— and deficit targets—three per cent of GDP in India; 3.5 per cent in the Maldives and Pakistan; and five per cent in Sri Lanka. Yet, most of these countries are among those in South Asia with the highest government debt-to-GDP ratios.

In Pakistan, government spending was significantly higher in election years and significantly lower after elections during 2000–07. Fiscal deficits were significantly larger in election years during 1973–2009.

Copyright Business Recorder, 2023

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